Zacks
0
All posts from Zacks
Zacks in Our Research. Your Success.,

Kellogg (K) Beats on Q1 Earnings, Lowers 2016 Sales View

Kellogg Company K delivered better-than-expected first-quarter 2016 earnings on the back of robust cost savings. However, sales fell short of expectations as the improved U.S. cereal trends seen last quarter could not be sustained.

The company also effectively lowered its previously issued full year 2016 organic sales growth expectations. Shares were down 2.4% in pre-market trading.

Earnings Beat

First-quarter adjusted earnings of 97 cents per share dipped 1% year over year due to significant currency headwinds.

Excluding currency headwinds of 36 cents (mostly from the Venezuela business), earnings increased 35.7% year over year on cost savings from the Project K and zero-based budgeting initiatives and inflation-driven pricing gains. Earnings also beat the Zacks Consensus Estimate of 93 cents by 4.3%.

Adjusted earnings exclude costs associated with Project K, a mark-to-market loss and certain other items. Including these items, however, the company’s earnings came in at 49 cents per share, down 23.4% year over year.

Revenues Miss

Kellogg reported revenues of $3.40 billion, down 4.5% year over year. Significant currency headwinds from the re-measurement of the Venezuelan business in mid 2015 resulted in the underperformance. Revenues also missed the Zacks Consensus Estimate of $3.49 billion by 2.7%.

Currency hurt sales by 11.7% in the quarter. Acquisitions and dispositions had a positive impact of 0.4%. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) improved 6.6%, better than 4.2% in the previous quarter, mainly driven by extraordinary inflation in Venezuela.

Excluding Venezuela, organic sales growth slipped 1%, worse than a gain of approximately 0.4% in the previous quarter due to lower sales in snacks and cereals in U.S.

Volumes declined 0.7%, more than 0.1% drop in the previous quarter. On the other hand, price/mix added 7.3% to sales, better than 4.3% last quarter, due to accelerating levels of inflation in Venezuela.

Profits Rise

Kellogg’s adjusted operating profit declined 1.3% to $520 million due to currency headwinds of 36.2%. However, excluding currency impact, adjusted operating profit surged approximately 34.9%. Also, excluding the impact of Venezuela, operating profit grew about 1.7% on strong Project K cost savings.

Profits deteriorated in Latin America and the Asia-Pacific, but improved in North America and Europe.

Segment Discussion

North America: Kellogg’s North America sales declined 1.5% (down 1.2% organically) year over year to $2.39 billion. However, the decline in organic revenues was wider than 0.4% drop in the previous quarter. Though volumes declined 1.1%, it was narrower than the 1.3% decrease in the previous quarter.  Price/mix inched up 0.1%, less than 0.9% in the previous quarter. Adjusted operating profit rose 8.4% organically in North America.

U.S. Morning Foods segment declined 1.2% to $767 million. Organic sales also declined 1.2%, weaker than growth of 1.5% in the previous quarter.

The improved cereal trends witnessed in the fourth quarter of 2015 could not be sustained in the first quarter though the company continued to gain market share.

The cereal business had slowed down since 2012 as category growth had been sluggish due to lower demand due to competitive pressures from other breakfast alternatives including yogurt, eggs, bread and peanut butter.

In order to improve sales performance, Kellogg launched campaigns supporting the breakfast occasion. It is also investing in in-store capabilities, product and packaging innovation as well as reformulation of many existing products to drive demand. Specifically, the company completely redesigned the Special K brand and re-launched it as a healthy lifestyle brand to cater to changing consumer trends. These activities led to improved cereal trends 2015.

The U.S. Snacks businesses, which have been struggling since 2013 due to weak volumes, declined 2.6%. The U.S. Specialty Channels business improved 4.1% organically, while the North America Other business deteriorated 2.7%.

Europe: The segment revenues of $598 million declined 1.6% due to currency headwinds. Organically, sales dipped 0.9%, less than an increase of 1.6% in the last quarter, due to lower price mix and softer volumes. Organic operating profit inched up 0.6% in Europe.

Latin America: The segment’s revenues of $192 million plunged 34.9% due to currency headwinds. Organically, sales soared 90.3% on inflation-based pricing in Venezuela. Excluding Venezuela, Latin America organic sales declined 2%. Organic operating profit, excluding inflation based Venezuela pricing, declined 26.7% in Latin America.

Asia Pacific: The segment revenues of $216 million declined 5.8% due to currency headwinds. Organically, sales increased 0.9%. Organic operating profit declined 6.3% in the Asia Pacific.

2016 Outlook

The company reduced its organic sales growth guidance due to slower-than-anticipated first-half sales growth in “some other businesses.’’ Management, however, did not specify the underperforming businesses.

Excluding the impact of Venezuela, organic sales growth is expected in the range of flat to 2% growth, less than prior expectations of 1–3%, which is also its long-term target. Including benefits from Venezuela, organic sales growth is expected in the range of 4–6%.

Adjusted constant currency earnings (including the impact of Venezuela) are now expected to increase between 13% and 15% to the range of $4.00–$4.07 per share. However, including currency impact, adjusted EPS guidance was maintained between $3.64 and $3.71.

Adjusted constant currency operating profit growth, including benefits from Venezuela, is now expected in the range of 11–13%. However, excluding Venezuela, the guidance was maintained in the range of 4–6%.

Kellogg holds a Zacks Rank #2 (Buy). Some other food stocks worth considering are Campbell Soup Company CPB, Mondelez International, Inc. MDLZ and Flowers Foods, Inc. FLO. While Campbell Soup sports a Zacks Rank #1 (Strong Buy), Mondelez and Flowers Foods hold a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
CAMPBELL SOUP (CPB): Free Stock Analysis Report
 
KELLOGG CO (K): Free Stock Analysis Report
 
FLOWERS FOODS (FLO): Free Stock Analysis Report
 
MONDELEZ INTL (MDLZ): Free Stock Analysis Report
 
To read this article on Zacks.com click here.