Kellogg (K) to Post Q4 Earnings: Cost Woes Likely to Linger?
Kellogg Company K is slated to come out with fourth-quarter 2018 results on Feb 7. This provider of ready-to-eat cereals and convenience foods, among others, has a mixed record of earnings surprises over the trailing four quarters. Let’s see how the company is positioned ahead of the upcoming quarterly results.
Kellogg Company Price and EPS Surprise
Kellogg Company Price and EPS Surprise | Kellogg Company Quote
What to Expect?
The Zacks Consensus Estimate has remained stable in the past 30 days at 88 cents, which reflects a decline of 8.3% from the year-ago quarter’s figure. Nonetheless, the consensus mark for revenues is $3,335 million, depicting a rise of 3.9% from revenues recorded in the year-ago quarter.
Factors That Pose Worries
Kellogg’s U.S. snacks business has been struggling since 2013 due to weak volumes. Though Pringles has been performing well, the deterioration is resulting from weakness in weight-management products like Special K bars, Special K cracker chips and Right Bites' 100-calorie cookie packs due to the same issues that hurt sales of weight-management cereal brands. The wholesome snacks business has mostly remained weak over the past few quarters due to effects of certain prior innovations that underperformed. Though management is working to revive the business through investments in innovation and better in-store execution, the efforts are yet to bear fruit. In 2017, the segment’s net sales dropped 4.1% year over year. Moreover, in the third quarter of 2018, sales in the segment fell 8.6%, owing to list-price adjustment and rationalization of SKUs. In fact, challenges in Snacks and Morning Foods businesses along with list-price adjustments dented organic revenues in the North American business.
Talking of the company’s Morning Foods business, Kellogg’s mainstay U.S. cereal business, which accounts for a major portion of sales, has been performing poorly since 2012 due to sluggish category growth. Lower demand for cereals due to competitive pressures from other breakfast alternatives, including yogurt, eggs, bread and peanut butter, has been hurting category growth. This is a major concern for sales in the U.S. Morning Foods segment, which fell 1.3% during the third quarter of 2018, primarily due to the recall of Honey Smacks Further. Operating profit in the segment declined in the third quarter, owing to lower sales, and higher investments and costs related to new pack formats.
Unfortunately, management expects higher investments, mix shifts and costs related to expansion of co-packed pack formats to dent fourth-quarter operating profit. Well, escalated costs are posing hurdles for many food companies like Pilgrim's Pride PPC, TreeHouse Foods THS and Campbell Soup CPB, among others. Coming back to Kellogg, the company trimmed adjusted earnings growth view to 7-8% (at cc) from 11-13% projected earlier. These factors raise concerns about the impending quarter.
Will Buyouts & Cost-Saving Efforts Aid the Stock?
Nevertheless, Kellogg is committed toward enhancing business through innovation, buyouts and cost-saving efforts. Notably, Kellogg acquired protein bar maker, Chicago Bar Company in 2017 to diversify its organic offerings. Chicago Bar Company makes RXBAR, which is considered the fastest growing nutrition bar brand in the United States. Further, the company has been gaining from the consolidation of Multipro, a Nigerian food distributor. Markedly, we note that during the second and third quarters of 2018, Kellogg’s revenue growth was primarily driven by the takeover of RXBAR and consolidation of Multipro. We expect these businesses to continue driving performance and positively impact Kellogg’s top line in the quarter to be reported.
Additionally, the company should get some cushion from its productivity saving initiatives. Kellogg is particularly striving to reduce overhead costs pertaining to Direct-Store Delivery in U.S. Snacks. Further, savings from the four-year Project K restructuring program are being invested in brand-building initiatives, in-store execution, sales capabilities and innovation to stabilize sales. Gains from such initiatives are also aiding the company to mitigate cost pressures mainly stemming from transportation. Further, the company started an aggressive zero-based budgeting (ZBB) program in 2015 in its North American business to generate savings in addition to that from Project K. We expect these factors to provide some respite to Kellogg in the quarter to be reported.
What the Zacks Model Unveils
Our proven model doesn’t show that Kellogg is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Though Kellogg carries a Zacks Rank #3, its Earnings ESP of -0.65% makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.
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