Kellogg Company has been navigating through rough waters for a while now, thanks to high expenses, stiff competition, weak U.S. snacks and Morning Foods businesses. All these weighed upon the company’s third-quarter 2018 results, wherein Kellogg marked its first earnings miss after two successive beats. In fact, management expects expenses to remain high, as a result of which, it trimmed adjusted earnings growth view for 2018.
Consequently, the Zacks Consensus Estimate has been witnessing a downtrend. We note that estimates for current and next year have moved south by 3 cents and 14 cents to $4.31 and $4.28, respectively, over the past 60 days.
In the past three months, this renowned food company, specializing in cereals and snacks, tumbled approximately 18%, wider than the industry’s decline of 12.7%. Let’s take a look at what’s ailing this Zacks Rank #4 (Sell) stock.
Reasons Behind Kellogg’s Dismal Run
Kellogg’s mainstay U.S. cereal business, which accounts for a major portion of the company’s sales, has been performing poorly for a while. This can be attributed to sluggish category growth. Notably, this unit has been impacted by lower demand for cereals owing to competitive pressure from other breakfast alternatives, and changing consumer preferences. In fact, such deterrents along with Honey Smacks’ recall, hurt the company’s U.S. Morning Foods segment performance during the third quarter of 2018.
Also, Kellogg’s snacks business has been crumbling due to weak volumes. The unit has been bearing the brunt of weakness in wholesome snacks, owing to lost distribution, and dismal performance of weight management brands. The wholesome snacks business has mostly remained weak over the past few quarters due to lost distribution including the effect of certain prior innovations that underperformed. Though management is working to revive the business through investments in innovation and better in-store execution, the efforts are yet to bear fruit.
While the aforementioned factors have been a drag on revenues, rising expenses has been marring the company’s profitability. Stiff competition in the food space has been compelling companies, including Kellogg, to engage in greater promotional and marketing spend. In fact, planned increases in advertising and promotion investments along with elevated distribution expenses impaired the company’s adjusted operating profit during the third quarter. Moreover, management expects higher investments, mix shifts and costs related to expansion of co-packed pack formats to weigh on profits in the fourth quarter. Also, the company trimmed adjusted earnings growth view to 7-8% (at cc) from 11-13% projected earlier.
Nevertheless, Kellogg has been gaining from the acquisitions of RXBAR and the consolidation of Multipro. Further, the company expects to continue delivering solid top-line results backed by strong brands. Additionally, Kellogg’s productivity saving initiatives have been on track. In this respect, the company is particularly striving toward reducing overhead costs pertaining to Direct-Store Delivery in U.S. Snacks.
However, we believe that such efforts will take time to yield results and win back investors’ confidence. That said, the current dismal performance remains a trouble for the company.
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