Kellogg Company (NYSE:K) K has been benefiting from increased demand for packaged food products amid the pandemic-led higher at-home consumption and pantry loading trends. The company’s brand strength has been a major driver, courtesy of regular innovation and lucrative buyouts. These upsides aided the company in third-quarter 2020, wherein both earnings and sales beat the Zacks Consensus Estimate, and sales grew year over year. Further, management raised its guidance for 2020.
However, the company’s foodservice business has been under pressure due to soft away-from-home demand stemming from social-distancing trends. Additionally, Kellogg has been incurring high costs related to COVID-19. Let’s delve deeper.
Factors Working Well for Kellogg
Kellogg has been gaining on increased demand for packaged food products amid the coronavirus-led stockpiling. Such trends also helped the company retain its organic sales trend in the third quarter, which moved up roughly 5% (on excluding currency and divestitures). Organic sales grew across all regions, largely on elevated cereal demand. Management stated that demand for packaged foods owing to the pandemic-led higher at-home consumption remained high, though it moderated from the preceding quarter. This, in turn, fueled the company’s sales in retail channels (including solid growth in emerging markets) and helped it counter the declines in food sold in the away-from-home network.
Further, the company undertook considerable brand investments worldwide in a move to further solidify its competitive position. Better-than-expected results and robust in-market performance across all four regions encouraged management to raise its guidance for 2020. Organic sales in the ongoing year are now estimated to grow around 6%, up from the previous guidance of 5%. Adjusted operating profit is expected to climb about 2% at cc now against the 1% drop projected earlier. Adjusted earnings per share are expected to increase around 2% now against the 1% dip estimated before.
Certainly, Kellogg’s strong brand portfolio, with brands such as Pringles, RXBAR, Bear Naked, Cheez-It, Rice Krispies Treats among many others, has been bolstering the company’s growth. The company is dedicated toward augmenting its portfolio through adding more products under existing brands, innovation and marketing initiatives. In this respect, it invests in digital media, consumer promotions and traditional advertising.
Factors Posing Concerns
While higher at-home consumption is driving Kellogg’s retail demand, the company’s foodservice business has been under pressure due to declines in food sold in the away-from-home network. This was witnessed in the September-end quarter, wherein away-from-home business was challenging. Away-from-home sales are likely to take some time to stabilize as schools, lodging and travel are expected to take time to recover. Also, Kellogg projects the at-home demand growth rate to decelerate. Apart from this, management expects decelerated growth in emerging markets amid the pandemic. Moreover, the emerging market growth rate is anticipated to decelerate amid the pandemic-led economic sluggishness in the fourth quarter.
Apart from this, Kellogg has been incurring elevated costs related to operations amid the pandemic, such as costs around safety, logistics, temporary labor and employee benefits. In the third quarter, Kellogg continued to incur high costs associated with COVID-19, which are likely to prevail this year. Furthermore, the company saw elevated advertising and consumer promotion investments and increased performance-based compensation. In addition, it had pushed certain investments related to brands, supply-chain and commercial plans to the second half of 2020. Consequently, management expects advertising and consumer promotion investments to increase in double-digits in the current quarter as well.
Nonetheless, let’s see if the abovementioned upsides can help this Zacks Rank #3 (Hold) company tackle the hurdles on its path. Shares of Kellogg have dropped 5.2% in the past three months against the industry’s growth of 6.3%.
Food Stocks Worth a Watch
United Natural UNFI, which currently carries a Zacks Rank #2 (Buy), has a trailing four-quarter earnings surprise of 4.8%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
B&G Foods BGS has a Zacks Rank of 2 and a trailing four-quarter earnings surprise of 9.3%, on average.
Hain Celestial (NASDAQ:HAIN) HAIN holds a Zacks Rank #2 and a trailing four-quarter earnings surprise of 24.6%, on average.
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