Kellogg's Cost Savings Efforts Working, But Special K Struggles Remain

Although Kellogg Company K seems to have “excellent visibility” into cost savings and should be able to achieve its new operating margin target, there are “leaks in the boat,” Credit Suisse’s Robert Moskow said in a report. He maintained an Outperform rating on the company, with a price target of $94.

Meetings with management reinforced the company’s excellent visibility into the cost savings needed to achieve its new operating margin target of 17-18 percent by 2018. Significant changes have been made to Kellogg’s internal processes and corporate culture in order to achieve the target, analyst Moskow commented.

Challenges Ahead

Despite management’s efforts, there seems to be “plenty of evidence” of top-line trends remaining under pressure till at least the yearend, since Kellogg is struggling with declines in its premium-priced Special K brand and challenges in wholesome snacks, Moskow mentioned.

Related Link: BMO Dives Deep Into Kellogg's Q2 Earnings

Although the Special K cereal business had stabilized in the US, Kellogg is facing continued decline in its high price-per-pound nutrition bars, pastry bars, and cracker chips. According to Nielsen data, the Special K brand is down 13 percent over the past 12 weeks, versus being down 9 percent over the past 52 weeks.

“Similarly, while management sounds confident that its Kashi brand has regained its stature with organic/natural foods consumers in the natural foods channel, (including a recent re-listing at Whole Foods), the brand has yet to recover in measured channels. Our data indicates sales down 16% over the past 12 and 52 weeks with big declines in snack bars, crackers, and pizza,” the analyst wrote.

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