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Kellogg (K) Beats on Q3 Earnings & Revenues, Margins Grow

Kellogg Company K posted better-than-expected third-quarter 2017 results. Cost-saving initiatives as well as higher demand for its frozen foods and Kashi snacks helped the company offset the industry-wide soft consumption trends for packaged food items.

Earnings Beat

Third-quarter comparable earnings of $1.05 per share beat the Zacks Consensus Estimate of 93 cents by 12.9%. Earnings increased 9.4% year over year banking on higher operating profit that offset a higher tax rate.

Adjusted earnings exclude costs associated with a mark-to-market loss and certain other items. Including these items, however, the company reported earnings of 85 cents per share, higher than the year-ago earnings of 82 cents.

Revenues Beat

Kellogg reported revenues of $3.27 billion, increasing 0.6% year over year after several quarters of revenue decline. The upside can be primarily attributed to the December 2016 acquisition of Parati in Brazil, as well as favorable currency translation. Revenues surpassed the Zacks Consensus Estimate of $3.21 billion by 1.8%.

Currency had a 0.6% positive impact on sales in the quarter. Acquisitions also had a 1.6% positive impact on revenues. However, Venezuela deconsolidation had a 0.2% negative impact on the top line. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) fell 1.4% compared with a 3.1% decline in the previous quarter. Except Asia Pacific, organic sales decreased across all other regions.

Volumes decreased 1.6%, a shade better than the 4.9% decrease in the preceding quarter. On the other hand, price/mix added 0.2% to sales, lower than the 1.8% contribution in the last quarter.

Profits Rise

Kellogg’s operating margin (currency-neutral comparable growth) was 17.6%, reflecting an improvement of 280 basis points (bps) year over year, as the company benefitted from strong productivity savings related to the Project K restructuring program, particularly this year's exit from its U.S. Snacks segment's Direct Store Delivery (DSD) system and its related elimination of overhead during the quarter.

Comparable operating profit grew 18.3% year over year in the quarter to $568 million.

Segment Discussion

Total North America: Kellogg’s North America sales declined 1.6% (also organically) year over year to $2.18 billion, due to the impacts related to the transition out of DSD in the U.S. Snacks business, as well as continued consumption softness in U.S. cereal in traditional retail channels. Volumes decreased 1% compared with a decline of 3.7% witnessed in the previous quarter. Price/mix decreased 0.9% compared with 1.8% growth in the prior quarter. Adjusted (comparable) operating profit increased 19.1% in the segment.

Europe: Segment revenues of $599 million improved 0.8% and currency had a 1.2% positive impact on revenues. Organically, sales were up 0.1% in the third quarter compared with a decline of 7% in the last quarter. Adjusted operating profit declined 0.9%.

Latin America: Segment revenues of $240 million improved 21.5% (organically, revenues were up 1.1%) owing to 6.1% price/mix growth and 3.2% positive impact from currency. Acquisitions also had a 24.4% positive impact of revenues. This was partly offset by a decline of 8.2% in volume. Adjusted operating profit decreased 6.9% in Latin America.

Asia Pacific: Segment revenues of $254 million improved 2.9% on the back of strong growth across the region for Pringles and continued broad-based growth in Asia. Organically, sales increased 2.9%, better than 2.1% growth in the last quarter. Volumes increased 2.7%, while price/mix had a negative impact of 0.7% on sales. Adjusted operating profit improved 10.9% in the Asia Pacific.

2017 Views Reaffirmed

The company continues to expect revenues to decline about 3% on a currency-neutral comparable basis.

The company expects adjusted constant currency earnings to grow in the range of 8-10% in the range of $4.03-$4.09 per share.

Adjusted constant-currency operating profit growth projection was maintained in the range of 7-9%. Operating margin is expected to improve more than a full percentage point, and is well on track to achieve its goal of 350 basis points expansion from 2015 through 2018.

Zacks Rank

Kellogg carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Peer Releases

Dr Pepper Snapple Group Inc. DPS reported third-quarter 2017 results, with earnings and revenues missing the Zacks Consensus Estimate. Third-quarter adjusted earnings per share of $1.10 of this Plano, TX-based company missed the Zacks Consensus Estimate of $1.15 by 4.3%.

The Hershey Company’s HSY third-quarter adjusted earnings per share of $1.33 beat the Zacks Consensus Estimate of $1.28 by 3.9%. Earnings also increased from the year-ago profit level of $1.29 by 3.1%.

Upcoming Peer Release

The Kraft Heinz Company KHC is set to report third-quarter results on Nov 1.

Kellogg Company Price, Consensus and EPS Surprise


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

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