Kellogg (K) Q4 Earnings Decline Year Over Year, Sales Rise

Kellogg Company (NYSE:K) came out with mixed fourth-quarter 2018 results. While earnings declined year over year, sales increased on the back of acquisitions. Earnings beat the Zacks Consensus Estimate, while sales missed the same. Notably, this marked the company’s first sales miss in a long time.

Shares of the company were last seen down more than 4% during the pre-market trading session. This could be attributable to the company’s top-line miss and costs related to constant investments in alternate pack formats and channels, among others. Management expects to continue making such investments in 2019, which is a threat to the bottom line in 2019. Incidentally, Kellogg envisions adjusted earnings to drop 5-7% on a constant-currency (cc) basis in 2019.

Concurrently, Kellogg unveiled some changes related to its segments for 2019. As part of its efforts to reorganize its North America region, Kellogg’s U.S. Snacks, U.S. Morning Foods, U.S. Specialty Channels and North America Other divisions will not exist from 2019. Further, the company will transfer its Middle East, Turkey and North African businesses from Kellogg Europe to Kellogg Asia-Pacific. Kellogg Asia-Pacific will be rechristened as Kellogg Asia, Middle East & Africa.

Q4 in Detail

Adjusted earnings of 91 cents per share came ahead of the Zacks Consensus Estimate of 88 cents. However, the bottom line dropped 2.2% year over year. On a currency-neutral basis, adjusted earnings remained flat year over year.

Kellogg reported revenues of $3,317 billion, which advanced 4.2% year over year, backed by acquisitions to the tune of about 7%. However, the top line fell short of the consensus mark of $3,336 million. Well, currency headwinds hurt sales growth by 3%. At cc, sales during the quarter improved 7.2% to $3,412 million. Further, organic revenues fell 0.6%.

Kellogg’s adjusted operating profit fell 3.2% to $433 million, whereas the same dipped 1.1% at cc to $442 million. Further, adjusted operating margin contracted 90 basis points (bps) to 13.1%.

Segment Discussion

North America: Kellogg’s North America sales of $2,043 million dipped nearly 2% on a reported and organic basis. During the quarter, sales declined across the U.S. Snacks, U.S. Morning Foods and U.S. Specialty Channels categories. Also, adjusted operating profit tumbled less than 13% at cc on account of lower sales, mix impacts, increased investments in R&D and infrastructure, and escalated costs related to alternate pack formats and networks.

Europe: The segment’s revenues of $591 million slipped 3.4% year on year, owing to unfavorable currency movements. Organic sales rose 1% on the back of higher sales of Pringles and wholesome snacks. Adjusted operating profit at cc improved roughly 3%, backed by higher organic sales.

Latin America: Revenues of $237 million in the segment tumbled 7.8% year on year, due to currency headwinds and loss of shipping days. Organic sales jumped approximately 5%, thereby keeping the momentum alive. Adjusted operating profit at cc increased more than 52%, fueled by savings and efficient price realization.

Asia-Pacific: The segment’s revenues of $446 million improved substantially year over year on the back of Multipro’s consolidation and favorable organic sales (up more than 5%), which were somewhat countered by currency woes. Adjusted operating profit at cc also witnessed a sharp improvement.

Other Financials

Kellogg ended the quarter with cash and cash equivalents of $321 million, long-term debt of $8,207 million and total equity of $3,159 million.

During the year, the company generated cash from operating activities of $1,536 million.

2019 Outlook

Kellogg showcased noteworthy improvement in 2018, in terms of consumption trends and net sales. The company’s increased advertising and promotional investments, and new pack formats and channels are yielding favorably, evident from consumers’ impressive response to Kellogg’s brands. Moreover, emerging market net sales growth increased in 2018, thanks to the company’s solid presence and product diversification. Also, the company is on track to generate productivity savings, which are enabling it to counter cost pressures, mainly stemming from higher transport costs. Further, Kellogg continues to witness increased costs related to brand-building investments and logistics, and co-packing expenses associated with new pack format expansions.

Though these factors weighed on the company’s operating profit, Kellogg plans to continue with these investments in 2019 as they bode well for future growth. This may entail escalated costs in the near term.

Kellogg expects revenues in 2019 to grow about 3-4% (at cc), backed by Multipro’s consolidation, and 1-2% growth in organic sales. Also, the company’s revenue-growth management initiatives are likely to lead to favorable volumes and price/mix, and help the company counter elevated costs.

However, adjusted operating profit growth (at cc) is anticipated to remain roughly flat year over year. Management expects higher investments, mix shifts and cost inflation related to expansion of other pack formats and networks to be offset by productivity gains and revenue-growth management endeavors.

Consequently, Kellogg envisions adjusted earnings to drop 5-7% (at cc) in 2019.

Price Performance

This Zacks Rank #3 (Hold) stock has gained 2.2% in a month compared with the industry’s rise of close to 5%.

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