Kellogg Company K looks well poised on the back of robust growth endeavors, including lucrative buyouts, focus on innovation and other brand enhancement efforts. Also, the company’s Deploy for Growth strategy bodes well. Apart from this, Kellogg has been benefiting from the burgeoning demand amid the coronavirus-led stockpiling and increased at-home consumption.
However, the company has been grappling with escalated costs. Further, volatile currency movements have been a concern. Let’s delve deeper.
Kellogg’s Growth Drivers
Kellogg has been gaining from a robust brand portfolio, courtesy of innovation and yielding acquisitions. Its portfolio consists of strong brands, such as Pringles, RXBAR, Bear Naked, Cheez-It, Rice Krispies Treats and many others. Kellogg is also dedicated toward augmenting its portfolio by adding more products under existing brands and through innovation and marketing initiatives. The company has been focused on investing in brand-building efforts. In this respect, it invests in digital media, consumer promotions and traditional advertising.
Further, the company is on track with the Deploy for Growth strategy and accordingly undertaking efforts to restructure the portfolio. As part of portfolio restructuring efforts, the company completed the sale of certain snacks, cookies, crusts and ice cream businesses in July 2019. Though these divestitures are likely to weigh on the company’s results in the near term, these are likely to help it focus on other lucrative business platforms and achieve greater efficiency. Moreover, the divestitures have helped the company reduce debt and improve its financial position.
Apart from this, the company has been gaining from increased buying of consumers owing to the coronavirus-led stockpiling. In first-quarter 2020, organic sales were backed by underlying business growth across categories and regions. In North America, the company witnessed consumption gains in core brands and categories along with increased shipments to support the burgeoning demand for packaged food amid the coronavirus-led lockdown. Sales in all other regions were also backed by increased demand for packaged foods due to higher at-home consumption. Management still expects organic sales to grow 1-2% in 2020, though it now expects sales and profits to flow in more during the first half. Other food companies like Kraft Heinz KHC, TreeHouse Foods THS and B&G Foods BGS have also benefited from increased demand owing to the coronavirus-led stockpiling.
Hurdles in Kellogg’s Way
Kellogg has been struggling with rising input costs. During the first quarter, its gross margin was hampered by input cost inflation. Apart from this, the company has been incurring elevated costs related to operations amid the pandemic. The company is investing in employee safety and undertaking increased cleaning and sanitization measures. Further, it is making investments in information technology to support remote working. These along with higher production and logistic costs are likely to exert some pressure on margins.
Also, currency headwinds had a roughly 2% impact on the top line in the first quarter. Moreover, adjusted operating profit fell 5.7% to $439 million due to currency headwinds and the absence of the abovementioned divested businesses. For 2020, adjusted operating profit is expected to decline 4% at cc and adjusted earnings to drop 3-4% at cc due to divestiture impacts.
Nonetheless, the aforementioned growth drivers, together with its productivity saving initiatives, are likely to aid this Zacks Rank #3 (Hold) company. Shares of the company have gained 19.6% in the past year against the industry’s decline of 3.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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