Kellogg (K) Q1 Earnings Beat, Revenues Lag On Weak Demand

Kellogg Company (NYSE:K) posted an earnings beat in the first quarter of 2017 on huge cost savings and a tax benefit. However, sales fell short of the expectations owing to industry-wide soft consumption trends for packaged food items.

Earnings Beat

First-quarter comparable earnings of $1.06 per share beat the Zacks Consensus Estimate of $1.01 by 5%. Earnings grew 10.4% year over year on productivity savings and a planned discrete tax benefit that offset the negative impact of currency translation.

Excluding currency headwinds of 3 cents, earnings increased 13.5% year over year.

Adjusted earnings exclude costs associated with Project K, a mark-to-market loss and certain other items. Including these items, however, the company reported earnings of 74 cents per share, higher than year-ago earnings of 49 cents.

Revenues Miss

Kellogg reported revenues of $3.25 billion, down 4.1% year over year, marking the ninth straight quarter of a revenue decline. Weak consumer demand mainly across most parts of the North American regions and Europe resulted in the decline. Revenues fell shy of the Zacks Consensus Estimate of $3.33 billion by 2.2%.

Currency hurt sales by 1% in the quarter. Acquisitions and dispositions had a 1.6% positive impact on revenues. However, Venezuela deconsolidation had a 0.3% negative impact on the top line. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) fell 4.4% in contrast to 1.4% growth in the previous quarter. Except Asia Pacific, organic sales decreased across all other regions.

Volumes dropped 5.7%, much lower than the 0.8% growth in the preceding quarter. On the other hand, price/mix added 1.3% to sales, higher than the 0.7% contribution last quarter.

Profits Rise

Kellogg’s comparable operating profit grew 0.4% to $518 million, partly hit by currency headwinds of 1.7%. Barring North America and Europe, profits improved across all the regions.

However, excluding the currency impact, adjusted operating profit increased approximately 2.2% on strong Project K cost savings.

Segment Discussion

North America: Kellogg’s North America sales dropped 4.2% (down 4.4% organically) year over year to $2.29 billion, due to the shift in the consumer preferences toward more healthier options over its processed food offerings. Volumes decreased 4.9% compared with 0.5% growth seen in the previous quarter. Price/mix was up 0.5% compared with a 0.1% drop in the prior quarter. Comparable operating profit decreased 1.6% in North America.

Europe: Segment revenues of $512 million declined 14.3% due to currency headwinds of 6.5%. Organically, sales were down 8.3% in the first quarter compared with a 1.1% drop seen last quarter. Organic operating profit declined 13.7%.

Latin America: Segment revenues of $222 million improved 15.8% (organically, revenues were down 0.9%) owing to 5.1% price/mix growth. This was partly offset by a 6% decline in volume and 2.9% currency headwind. Comparable operating profit increased 11.3% in Latin America.

Asia Pacific: Segment revenues of $232 million improved 7.3% led by strong growth across the region for Pringles. Organically, sales increased 2.9%. Comparable operating profit improved 35.3% in the Asia Pacific. Volumes and price/mix grew 2.2% and 0.7%, respectively, in the quarter.

2017 View

The company now expects revenues to decline about 3% (down 2% as expected earlier) on a currency-neutral comparable basis.

The company expects adjusted constant currency earnings (including the impact of Venezuela) in the range of $4.03–$4.09 per share.

However, including currency impact, adjusted EPS guidance is forecast between $3.91 and $3.97.

Adjusted constant currency operating profit growth projection was maintained in the range of 7–9%. Operating margin is expected to improve more than a full percentage point, and is well on track to achieve its goal of 350 basis points expansion from 2015 through 2018.

Zacks Rank

Kellogg carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Peer Releases

Mondelez International, Inc. (NASDAQ:MDLZ) reported first-quarter 2017 results, with both earnings and revenues surpassing the Zacks Consensus Estimate. Cost-saving initiatives as well as good pricing mainly in Latin America helped the company to post better-than-expected results.

The Hershey Company’s (NYSE:HSY) earnings beat the Zacks Consensus Estimate, while sales missed the same in first-quarter 2017. The leading chocolate manufacturer also updated its expectations for 2017.

Pinnacle Foods, Inc. (NYSE:PF) reported mixed first-quarter 2017 results. Adjusted earnings of 50 cents beat the Zacks Consensus Estimate by 8.7%, whereas sales of $766.1 million lagged by 0.4%.

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