Will North America Business Hurt Kellogg's (K) Q4 Earnings?

Kellogg Company (NYSE:K) is set to report fourth-quarter 2017 results on Feb 8, before the opening bell.

The company has been witnessing top-line weakness over the last couple of years, primarily due to lower demand in North America. The food industry in the region is experiencing changes in consumer preference toward natural and organic ingredients over packaged and processed food.

Business in North America Weak

The North America business accounts for about 68% of Kellogg’s total revenues. Hence it is evident that the revenue generated from this segment largely impacts the overall revenues of the company. The segment is further categorized into U.S. Morning Foods, U.S. Snacks, U.S. Specialty and North America Other.

In the prior quarter, Kellogg’s total North America sales declined 1.6% year over year to $2.18 billion, owing to the exit from its U.S. Snacks segment's Direct Store Delivery (DSD) system and continued consumption softness in U.S. cereal in traditional retail channels. Moreover, in the first nine months of 2017, sales declined 2.8% from the prior-year period. The trend is expected to continue in the to-be-reported quarter. Overall, for the fourth quarter, the Zacks Consensus Estimate for North America segment revenues is pegged at $2.06 billion, implying a 3.2% decline.

North America Business by Segment

U.S. Morning Foods: Kellogg’s mainstay U.S. cereal business, which accounts for 40-45% of sales, has been performing poorly for quite some time now. Lower demand for cereals due to competitive pressure from other breakfast alternatives, including yogurt, eggs, bread and peanut butter, has been hurting category growth. In the prior quarter, revenues slipped 3% and declined 5.3% in the first nine months. The trend is expected to persist in the to-be-reported quarter, with revenues likely to decline 3.4% per the consensus estimate.

U.S. Snacks: This business has been struggling since 2013 due to weak volumes. In the prior quarter, sales declined 4.5% from the year-ago level due to reduced merchandising and SKU rationalization. Also, in the first nine months of 2017, the segment’s net sales dropped 3.6% year over year. The trend is expected to continue in the to-be-reported quarter with revenues likely to decline 8.1% per the consensus estimate.

U.S. Specialty: This segment’s sales rose 1.9% in the prior quarter, marking the ninth straight quarter of sales growth, given strength in the convenience and foodservice channels, such as K-12 schools. The Zacks Consensus Estimate for U.S. Specialty segment revenues is pegged at $286 million, implying a 1.1% increase.

North America Other: Segmental revenues grew 4.4% in the prior quarter on contribution from frozen foods. The trend is expected to continue in the to-be-reported quarter with revenues likely to increase 3.2% per the consensus estimate.

Overall Earnings & Revenue Expectations

The Zacks Consensus Estimate for total revenues of $3.11 billion indicates a 0.4% uptick on a year-over-year basis. In the first nine months of 2017, net sales declined 2% (down 3.4% organically) with volumes down 4.1% as a result of soft consumption trends across most categories during the period.

Kellogg Company Revenue (TTM)

Nonetheless, given the tepid sales growth, the company is making aggressive efforts toward improving its food offerings. The company is investing in brand building, in-store capabilities along with product and packaging innovation. Also, revenues are expected to benefit from Pringles’ improved performance in Europe, the Parati acquisition in Brazil, better shipments and improvement in pricing and mix in Mexico and Australia.

Earnings increased 9.4% year over year in the prior quarter and surpassed the consensus estimate by 12.9%. Also, Kellogg’s surpassed earnings in all of the past four quarter, the average beat being 7.9%. Notably, the consensus estimate for fourth-quarter earnings is pegged at 96 cents, reflecting a 4.4% year-over-year increase (read more: Kellogg Q4 Earnings: What's in Store for the Stock?).

Bottom Line

The decelerating performance at the North American segment will likely continue in the quarter. Nevertheless, cost-saving initiatives as well as higher demand for frozen foods and Kashi snacks will likely help the company reverse the industry-wide soft consumption trend for packaged food items.

Zacks Rank & & Upcoming Peer Releases

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

Campbell Soup Company (NYSE:CPB) and The Kraft Heinz Company (NYSE:K) are slated to report quarterly numbers on Feb 16.

B&G Foods (NYSE:BGS) is expected to report quarterly results on Feb 27.

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