Kellogg (K) Beats Q2 Earnings, Sales as Cereals Improve - Analyst Blog

Kellogg Company K continued the first-quarter momentum in the second quarter, surpassing the Zacks Consensus Estimate for both earnings and sales despite negative currency impact.

After a difficult 2014, the world’s largest cereal maker witnessed improved sales trends in the first half of 2015 backed by product introductions and brand building initiatives and investments funded by savings from its restructuring program, Project K.

Earnings Beat

Second-quarter adjusted earnings of 92 cents per share declined 9.8% year over year due to significant currency headwinds.

However, earnings beat the Zacks Consensus Estimate of 91 cents by 1.1% but were in line with the company’s expectations. Excluding currency headwinds of 5 cents, earnings declined 4.9% year over year as improved sales trends and gain from lower taxes were offset by lower profits.

Adjusted earnings exclude charges related to re-measurement of the Venezuelan business, integration costs, costs associated with Project K, a mark-to-market gain and certain other items. Including these items, reported earnings were 63 cents per share, down 23.2% year over year.

 

Kellogg Company - Earnings Surprise | FindTheBest

Revenues Continue to Improve

Kellogg’s reported revenues of $3.5 billion which declined 5.1% year over year due to significant currency headwinds.

As Kellogg generates around 40% of net sales outside the U.S., a strong dollar lowered the value of international sales. With almost all foreign currencies deteriorating versus the U.S. dollar, currency translations are posing a significant headwind in 2015, thereby limiting revenue growth.

Currency hurt sales by 5.5%, while acquisitions and dispositions had a positive impact of 0.3%. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) improved 0.1%.

Organic sales increase was also better than declines of 0.3% and 2.2% seen in the previous two quarters due to improved cereal sales trends in North America and higher sales in Asian and Latin American businesses. Revenues also beat the Zacks Consensus Estimate of $3.47 billion by 6.5%.

Volumes declined 0.4% better than a 0.7% shortfall in the previous quarter. On the other hand, price/mix added 0.5% to sales, better than 0.4% in the previous quarter.

Profits Down

Kellogg’s adjusted operating profit declined 6.8% to $529 million on a currency neutral basis due to higher distribution costs, costs related to production timing and the resetting of incentive compensation. Profits declined in North America, but improved in Asia/Pacific, Europe and Latin America.

Segment Discussion

North America: Kellogg’s North America sales declined 2.8% (down 1.8% organically) year over year to $2.29 billion. However, encouragingly, the decline in organic revenues was better than 2.8% drop in the previous quarter as sales trends continued to improve in cereals. Both price/mix and volumes declined 0.9%.

Organically, the U.S. Morning Foods business, which includes cereals such as Corn Flakes and Special K, declined 2.3%.

Kellogg’s U.S. cereal business, accounting for 40–45% of sales, has been performing poorly since 2012 due to sluggish category growth. Lower demand for cereals due to competitive pressures from alternatives such as yogurt, eggs, bread and peanut butter are hurting category growth. Moreover, shift in consumer attitude from dieting to health and wellness is hurting sales of Kellogg’s weight management cereal brands, like Special K.

In order to improve its 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 is completely redesigning the Special K brand (cereals and snacks) with plans to re-launch it as a healthy lifestyle brand in view of the changing consumer trends.

It seems that these activities have started to show some results as cereal trends improved in both the quarters of 2015 reported so far. In the second quarter, organic sales decline in the U.S. Morning Foods business was better than the 2.9% shortfall last quarter due to improved category and share trends in cereals.

The U.S. Snacks businesses — struggling since 2013 due to weak volumes— declined 1.8%.However, unlike cereals, this business could not sustain the improved sales trends witnessed in the first quarter as organic revenue decline in the second quarter was higher than 1.1% seen in the last quarter.

The U.S. Specialty Channels business declined 1.2% organically, while the North America Other business went down 1.3%.

Adjusted operating profit declined 12.7% in North America due to lower sales and higher costs.

International: During the quarter, revenues in Europe declined 2.5% organically to $650 million. Asia Pacific increased 6.8% organically to $234 million helped by growth in the Asian business. Latin America also improved 14.5% to $328 million due to growth across the region.

Adjusted operating profit (constant currency) improved 5.6% in Europe, 8.9% in Latin America and 76% in Asia Pacific.

2015 Guidance Re-Affirmed

Kellogg maintained the 2015 outlook. Organic revenue growth is expected to remain flat in 2015.

Also, adjusted operating profit is expected to decline between 2% and 4%.

Adjusted earnings per share are expected in the range $3.74–$3.82, representing growth in the range of negative 2% to flat. The earnings guidance excludes the impact of currency as well as an extra week in 2014.

Both operating profit and earnings per share guidance, however, include a negative impact of 3 to 4 percentage points from changes in its incentive-based compensation plan for 2015.

Stocks to Consider

Kellogg currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader food and beverage sector are Mondelez International, Inc. MDLZ, Cal-Maine Foods, Inc. CALM and Post Holdings, Inc. POST. All the three stocks sport a Zacks Rank #1 (Strong Buy).

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