Kellogg's Cereal Woes Continue - Analyst Blog

On Mar 13, 2014, we issued an updated research report on Kellogg Company K.

On Feb 6, the global snacks and cereal company reported disappointing fourth-quarter 2013 results due to slower sales in the U.S. Kellogg's adjusted earnings of 83 cents per share beat the Zacks Consensus Estimate by a penny and increased 18.8% as the softer top-line performance was offset by strong gross margins and lower-than-expected tax rate. Revenues fell 1.7% once again due to lower volumes in the U.S. snacks and cereals businesses.

The 2014 outlook was also depressing. The organic sales, adjusted operating profit as well as earnings per share guidance fell well short of the long-term targets – suggesting that the 2013 woes could continue well into 2014.

However, Kellogg has strong fundamentals with its solid brand positioning, geographic diversity and significant investments behind innovation, marketing and supply-chain initiatives. We are also encouraged by the growth potential, diversification and international presence that the Pringles deal provides. Pringles, acquired by Kellogg in Jun 2012 from The Procter & Gamble Company PG, has performed quite well. Sales and profit in the business have exceeded management's expectations in every quarter since the transaction closed.

However, the strained cereal and snacks categories keep us on the sidelines. Kellogg's mainstay U.S. cereal business, accounting for 40–45% of sales, performed poorly in 2012 and 2013 due to sluggish category growth. Lower demand for cereals due to competitive pressures from alternatives including yogurt, eggs, bread, and peanut butter is hurting category growth. Though the company is trying to re-invigorate this segment through innovation and aggressive marketing campaigns, these activities are yet to show results.

Moreover, even though the new cost savings plan, Project K, will free up funds for brand building, innovation and overall growth, it would easily take a couple of years before it delivers substantial results.

Another company that is being pressured by its cereals business is General Mills, Inc. GIS. General Mills' cereal sales declined 2% in fiscal 2013 due to weak category growth.

Other Stocks to Consider

Kellogg currently carries a Zacks Rank #3 (Hold). A better-ranked food stock is The Hain Celestial Group Inc. HAIN which enjoys a Zacks Rank #2 (Buy).