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Kellogg (K) Perks Up Guidance on Q2 Earnings & Sales Beat

Zacks Equity Research

Kellogg Company K reported splendid second-quarter 2020 results, as both earnings and sales beat the Zacks Consensus Estimate and the bottom line surged year over year. The better-than-expected performance encouraged management to perk up its guidance for 2020. Clearly, these upsides sent shares of the company rallying by almost 3% in the pre-market trading session on Jul 30.

Kellogg’s quarterly results were backed by solid demand stemming from higher at-home consumption amid the pandemic. The company particularly saw strong demand for cereal and frozen food products in developed regions. This was countered by impacts from the divestiture of the cookies, fruit snacks, pie crusts and ice-cream cone businesses (concluded in July 2019). However, Kellogg gained from its efforts to raise production in order to meet the rising demand, which helped it battle the high costs. The company also shifted a considerable amount of investments related to brands, supply-chain and commercial plans to the second half of 2020, which aided its profit and earnings during the June-end quarter.

Quarter in Detail

Adjusted earnings of $1.24 per share jumped 25.3% year over year, cruising ahead of the Zacks Consensus Estimate of 93 cents. On a constant-currency (cc) basis, adjusted earnings came in at $1.26 per share, which increased 27.3% from the year-ago quarter’s figure.

Kellogg Company Price, Consensus and EPS Surprise

Kellogg Company Price, Consensus and EPS Surprise
Kellogg Company Price, Consensus and EPS Surprise

Kellogg Company price-consensus-eps-surprise-chart | Kellogg Company Quote

The company delivered net sales of $3,465 million, which climbed 0.1%, year on year, as well as surpassed the consensus mark of $3,277 million. Adverse impacts from divestiture of the company’s cookies, fruit snacks, pie crusts and ice-cream cone businesses, as well as currency headwinds were offset by robust organic sales growth in other businesses, resulting from pandemic-led increased buying. Absence of the divested businesses affected sales by about 6%, whereas currency headwinds had a roughly 3% impact on the top line.

Organic sales (excluding currency and divestitures) moved up 9.2% to $3,569 million. Management stated that demand increase for packaged foods owing to the pandemic-led higher at-home consumption prevailed for a longer-than-expected period. This, in turn, fueled the company’s sales in retail channels and helped it counter the declines in food sold in the away-from-home network.   

Adjusted operating profit jumped 24.2% to $562 million, whereas the metric rose 26.7% to $573 million at cc.

Segment Discussion

Sales in the North America segment amounted to $2,167 million, up 0.9% as divestiture impacts were countered by impressive growth in other businesses amid the pandemic. Sales grew 11.1% on an organic basis. Moreover, adjusted operating profit jumped about 23% at cc — due to the same factors fueling sales in the segment.

Revenues in the Europe segment totaled $546 million, up 0.8% year on year, including currency headwinds of more than 3%. Further, sales rose 4.1% on an organic basis, on increased cereal demand amid the pandemic. Robust cereal sales countered the anticipated declines in snacks — due to lower demand for on-the-go foods and pack-formats; sluggish Russian sales due to a soft economy and delay in marketing plans for Pringles. Adjusted operating profit improved 35% at cc.

Revenues in Latin America totaled $223 million, down 6.9% year on year due to currency headwinds of 20%. Sales grew 14.3% on an organic basis on solid cereal sales. Strong cereal sales compensated for weak snacks sales stemming from the pandemic-led closure of high-frequency stores and lower on-the-go snacking occasions. Adjusted operating profit surged 89% at cc.

Revenues in the Asia, Middle East & Africa segment totaled $529 million, down 0.7% year over year, including currency headwinds of about 6%. Sales improved 5.1% on an organic basis as continued growth in Multipro and cereal sales and gains in Nigeria compensated for soft snacks sales. Snacks sales were hurt by the pandemic-induced hurdles, and slowing economies in some markets in Asia, Middle East and Africa. Adjusted operating profit was up 4% at cc.

Other Financials

Kellogg ended the April-June quarter with cash and cash equivalents of $1,047 million, long-term debt of $6,929 million and total equity of $3,406 million. In the year-to-date period, the company has generated cash from operating activities of $971 million.

Cash flow from operating activities is now likely to be $1.6 billion in 2020 compared with the previously-guided range of $1.5-$1.6 billion. Capital expenditures are still expected to be $0.6 billion and cash flow is now estimated to be roughly $1 billion. Cash flows were projected in the band of $0.9-$1 billion earlier.

2020 Guidance

Kellogg expects at-home consumption increases to moderate to normal levels by fourth-quarter 2020. The company predicts away-from-home demand to take some time to recover, and it also anticipates emerging markets to be affected by the slowing economies. Additionally, Kellogg expects to sustain direct costs associated with sanitization, safety and labor, and has also pushed certain brand investments to the second half of 2020. Nevertheless, the company raised the 2020 guidance on the back of robust sales and profits in the first half.  

Organic sales in the ongoing year are now estimated to grow around 5%, up from the previous guidance of 1-2%. Adjusted operating profit is expected to decline nearly 1% at cc now compared with the 4% drop projected earlier. Adjusted earnings per share are expected to dip roughly 1% at cc compared with the 3-4% decline estimated before. Adjusted operating profit and earnings will likely bear divestiture impacts.

This Zacks Rank #2 (Buy) stock has gained 8.3%, year to date, compared with the industry’s rise of 7.7%.

Looking for More Food Stocks? Check These

Kraft Heinz KHC, which currently carries a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TreeHouse Foods THS also has a Zacks Rank #2, along with a long-term earnings growth rate of 6.5%.

Flowers Foods FLO, which carries a Zacks Rank #2 at present, has an impressive earnings surprise record.

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