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Kellogg Looks Unappetizing on Rising Costs & Weak Units

Zacks Equity Research

Like most players in the U.S. food space, persistent rise in costs are making matters tough for Kellogg Company K. Moreover, this renowned cereal and snacks provider is witnessing headwinds like weak segments, currency volatility and divestitures. Let’s have a closer look.

Rising Costs & Divestiture to Weigh on Profits

Kellogg’s performance is bearing the brunt of high costs related to brand-building investments and logistics as well as co-packing expenses associated with new pack format expansions. The company plans to continue with these investments in 2019, which is likely to elevate cost burden. These costs along with mix shifts and the absence of tax benefits are likely to weigh on the bottom line in 2019.

Moreover, the recently announced divestiture of certain cookies, pie crusts, fruit and fruit-flavored snacks as well as ice cream cones businesses to Ferrero Group and associated firms is likely to weigh on performance. The deal is expected to reduce the company’s projected bottom line (on a currency-neutral basis) for 2019 by less than 5%. Previously, management predicted the bottom line to decline in the range of 5-7% (at constant currency) in 2019.

Sluggish Morning Foods & Snacking Business

Kellogg’s mainstay U.S. cereal business, has been performing poorly since 2012 due to sluggish category growth. Sales in the U.S. Morning Foods segment fell more than 2% in 2018, primarily due to lower cereal consumption that stemmed from supply-chain hurdles related to Honey Smacks and category-wide weakness. Further, adjusted operating profit in the segment fell 10% in 2018 due to lower sales, adverse mix as well as costs associated with new pack formats.

Additionally, Kellogg’s U.S. snacks business has been struggling since 2013 due to weak volumes. The category is losing sheen, thanks to weakness in weight-management brands such as Special K bars, Special K cracker chips and Right Bites' 100-calorie cookie packs. Moreover, the wholesome snacks business has been persistently weak over the past few quarters due to lost distribution including the effect of certain prior innovations that underperformed. In fact, challenges in the U.S. Snacks, Morning Foods and U.S. Specialty Channels categories weighed on Kellogg’s North America sales that declined on an organic basis in 2018.

Wrapping Up

The aforementioned headwinds along with anticipations of adverse currency impacts in 2019 are spoiling the broth for this Zacks Rank #4 (Sell) stock. Well, shares of the company have lost 16.1% in the past six months compared with the industry’s fall of 5%.

Nevertheless, management is striving to revive the business through innovations, cost-saving initiatives and focus on resource optimization. Let’s wait and see if such efforts yield results and uplift investors’ sentiments in the forthcoming periods.

Don’t Miss These Solid Food Stocks

MEDIFAST MED, with long-term earnings growth rate of 20%, sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

General Mills GIS, with a Zacks Rank #2 (Buy), has long-term earnings per share (EPS) growth rate of 7.5%.

Sysco Corporation SYY, with long-term EPS growth rate of 10.3%, carries a Zacks Rank #2.

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