Kellogg’s Reports Seventh Straight Quarter of Revenue Fall

Net sales fell 2.2% Y-o-Y to $3.25 billion, missing average estimates of $3.28 billion

k1Convenience food maker Kellogg Company (NYSE: K) announced its Q3 FY16 financial results on November 1st, 2016.

The Battle Creek, Michigan-based company manufactures and markets ready-to-eat cereal and convenience foods. It operates through the U.S. Morning Foods, U.S. Snacks, U.S. Specialty, Other North America, Europe, Latin America, and Asia/Pacific segments.

It offers cereal products under the Kellogg’s brand name; and cookies, crackers, crisps, and other convenience foods under the Kellogg’s, Keebler, Cheez-It, Murray, Austin, and Famous Amos brands. With 2015 sales of more than $13 billion, Kellogg is the world’s leading cereal company; second largest producer of cookies and crackers; a leading producer of savory snacks; and a leading North American frozen foods company. Read more about Kellogg’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Kellogg’s reported net sales fell 2.2% Y-o-Y to $3.25 billion, missing average estimates of $3.28 billion, versus $3.32 billion in the year-ago period. Sales declined for the seventh straight quarter mainly due to trade-inventory reductions in U.S. cereal, a challenging U.K. market, and portfolio transformations that have taken longer than anticipated to execute.

During the reporting quarter, comparable net sales fell 2.5% Y-o-Y to $3.24 billion versus $3.32 billion in the year-ago period. Comparable net sales, excluding Venezuela, fell 2.6% to $3.24 billion during the reporting quarter due to softness in U.K. cereal, and portfolio transitions in U.S. Frozen and Kashi businesses.

Source: Kellogg
Source: Kellogg

During the quarter in review, reported operating profit jumped 22.9% Y-o-Y to $410 million due to lower one-time costs, as well as to profit-margin expansion across all Regions. Currency-neutral comparable operating profit increased 6.8% to $499 million because of the profit-margin benefit of efficiencies in SG&A expenses, reflecting the impact of zero-based budgeting.k3Finally, Q3 FY16 reported net income rose to $292 million, or $0.82 per share, from $205 million, or $0.58 per share, in the year-ago period. Excluding items, Kellogg’s adjusted EPS increased 13% Y-o-Y to $0.96, beating estimates of $0.87 per share, despite the negative impact of currency translation. Reported EPS were up 41% Y-o-Y, driven mainly by decreased one-time costs, higher profit margins, and a lower effective tax rate. Non-GAAP, currency-neutral comparable earnings increased by 17.6% Y-o-Y to $1.00, due to better profit-margin expansion across all regions and a lower effective tax rate.

Segmental highlights

Kellogg North America: This region’s Q3 FY16 net sales declined on a reported and currency-neutral comparable basis, but reported and currency-neutral comparable operating profit grew on the strength of cost savings under the Project K and Zero-Based Budgeting initiatives.

U.S. Morning Foods: This segment’s Q3 FY16 net sales declined on both a reported and currency-neutral comparable basis, but it improved its category share, led by its six core cereal brands and Pop-Tarts. On both a reported and currency-neutral comparable basis, the segment’s operating profit margin again improved strongly, driving operating profit growth in the quarter. k4U.S. Snacks: This segment’s Q3 FY16 net sales remained flat on both a reported and currency-neutral comparable basis, an improvement in trend led by core brands like Cheez-It, Pringles, and Rice Krispies Treats, each of which grew consumption. On both a reported and currency-neutral comparable basis, the segment posted another quarter of strong operating profit margin expansion, leading to operating profit growth during the reporting quarter. k5U.S. Specialty: This segment’s Q3 FY16 net sales posted increases in reported and currency neutral comparable net sales, with growth in key brands and channels. On both a reported and currency-neutral comparable basis, this segment witnessed growth in operating profit margin and operating profit during the reporting quarter.k6North America Other: This segment, comprising the U.S. Frozen Foods, Kashi, and Canadian businesses, posted a decrease in reported and currency-neutral comparable Q3 FY16 net sales, due to the volume impact of price increases in Canada, and continued impacts of portfolio rationalization and food and packaging transitions in Frozen Foods and Kashi. On a reported and currency-neutral comparable basis, the segment’s net sales decline pulled down its operating profit during the reporting quarter.k7k8Europe: During Q3 FY16, Kellogg Europe posted a decrease in reported net sales, driven primarily by adverse currency translation, while currency-neutral comparable net sales decreased slightly. The decline was due to lower sales in the U.K., where Kellogg continues to face a challenging retailing environment. This more than offset broad-based growth elsewhere in the region, led by improving share trends in cereal and continued growth in Pringles. Both on a reported and currency-neutral comparable basis, Europe improved its operating profit margins, which drove higher operating profit during the reporting quarter.

k9Latin America: In this region, Kellogg reported net sales decline due to adverse currency translation, while currency-neutral comparable net sales jumped due to inflationary effects in Venezuela. Currency-neutral comparable net sales also grew outside of Venezuela, led by gains in Mexico and Brazil. On a reported and currency-neutral comparable basis, both with and without Venezuela, Latin America improved its operating profit margin, driving strong operating profit growth during the reporting quarter.

k10Asia/Pacific: During Q3 FY16, Kellogg’s reported and currency-neutral comparable net sales in Asia/Pacific increased, led by robust growth for Pringles. Joint ventures in China and West Africa continued to grow at a double-digit rate. On both a reported and currency neutral comparable basis, Asia/Pacific increased its operating profit margin, generating operating profit growth in the quarter.

Other highlights

Kellogg, responding to weak demand for its processed foods, launched “Project K” in 2013, and is on track to save up to $475 million annually by 2018 through job cuts and production optimization. The company also rolled out zero-based budgeting, under which managers have to justify expenses for each budget period. For FY16, the company is on track to achieving cash flows of $1.1 billion. By the end of Q3 FY16, Kellogg’s cash flow stood at $645 million.

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Guidance for full year FY16 and beyond

Kellogg raised its FY16 adjusted earnings forecast to between $4.16 per share and $4.23 per share in constant currency terms from its $4.11-$4.18 forecast earlier. The company kept its guidance unchanged for currency-neutral comparable operating profit, at a growth of 15% to 17%, or 4% to 6% excluding Venezuela. This reflects better-than-anticipated margin expansion, which should offset the impact of net sales coming in lower than expected. The Company revised downwards its net sales outlook and expects to grow a little less than 4% on a currency-neutral comparable basis, and down about 1% excluding Venezuela.

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Stock Performance

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Kellogg’s stock ended the day at $74.95, gaining 1.74%, at the close on Monday, November 7th, 2016, having vacillated between an intraday high of $75.06 and a low of $74.06 during the session. The stock’s trading volume was at 1,283,286 for the day. The Company’s market cap was at $26.65 billion as of Monday’s close.

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