Kellogg Hit By Soft Q1 Sales: Will The Weakness Continue?

We issued an updated research report on Kellogg Company (NYSE:K) on May 12, 2016.

Kellogg delivered mixed first-quarter 2016 results with earnings outperforming the Zacks Consensus Estimate but sales missing the same. Both metrics declined year over year due to significant negative Fx impact. However, excluding Fx, earnings of $0.97 per share surged 36% backed by Project K savings and inflation-driven pricing gains. Excluding extraordinary inflation in Venezuela, organic sales growth slipped 1% due to slower-than-anticipated sales growth in some businesses.

Sales force transition in the U.S. snacks business, product transitions in U.S. Frozen Foods, and unfavorable timing of investments in Europe cereals hurt sales in the quarter. Also market conditions in Europe and Latin America adversely affected international sales in the quarter.or a

Kellogg has been struggling to grow sales over the past two years mainly due to weak performance in its developed market cereals and U.S. snacks businesses.

Lower demand for cereals due to competitive pressures from other breakfast alternatives like yogurt, eggs, bread and peanut butter is hampering cereal category growth. Moreover, changing consumer views on health and wellness and shift in consumer attitude from dieting to health and wellness has hurt sales of Kellogg’s weight management cereal brands.

The U.S. snacks business has been also been struggling since 2013 due to weak volumes. Though Pringles has been doing well, the U.S. snacks have been underperforming due to weakness in weight management products like Special K bars, Special K cracker chips and Right Bites' 100-calorie cookie packs owing to the same issues that hurt sales of weight management cereal brands. The wholesome snacks business has also remained weak over the past few quarters due to lost distribution, including the effect of certain prior innovations that did not perform well.

Keeping in line with this, the company has invested in brand building, in-store capabilities and product and packaging innovation as well as reformulating many existing products. Moreover, cost savings from its re-structuring program – Project K – have been supporting renovation, innovation and brand support. In fact, these initiatives led to better-than-expected results in 2015, especially in the U.S. cereals businesses. However, the improved sales trends could not be sustained in the first quarter of 2016.

Nonetheless, all the factors that hurt sales in first quarter were temporary and management is optimistic about better results in the future as sales trends improve in certain categories and markets.

Kellogg has a Zacks Rank #3 (Hold). Some better-ranked food stocks include B&G Foods Inc. (NYSE:BGS) , Post Holdings, Inc. (NYSE:POST) and Omega Protein Corporation (NYSE:OME) . All the three stocks sport a Zacks Rank #1 (Strong Buy).