Cautious Call On Kellogg; Shares Downgraded On Risk To Shelf Space

Analysts at Piper Jaffray no longer hold a bullish view on Kellogg Company K amid a view that retailer push back against food companies is a "real threat" to food companies. The firm's Michael Lavery downgraded Kellogg's stock rating from Overweight to Neutral with a price target slashed from $78 to $72.

Grocery giant Kroger Co KR made public during its recent earnings conference call that a space optimization program is being planned, Lavery commented in his downgrade note. This will naturally result in a shrinking center store space (i.e, the "middle aisles") to make room for fresh and other perimeter store type items (deli, cheese, etc). Also, the grocery chain is looking to add more private label items — all of which poses a risk to Kellogg's cereal category. In fact, Kroger alone accounts for around 8 percent of Kellogg's total sales, the analyst added.

tipranks_360.png

Meanwhile, Kellogg's third-quarter-to-date sales momentum is showing some troubling signs, the analyst continued. Specifically, data points the analyst compiled found that its sales is roughly 1 percentage point worse than it was versus comparable second quarter data. As a whole, total U.S. measured retail sales of around 5.5 percent could imply a 7-percent decline in sales for Kellogg's, which makes the company's margin targets "even more difficult to achieve."

Finally, Kellogg's ongoing stock buyback program could add some support to shares, the analyst suggested. The recent pullback in the stock likely implies the company will be buying back 17 million shares of its own stock over the next six quarters versus a prior estimate of 12 million shares.

Bottom line, Kellogg's sales trends are worse than expected and the ongoing shift to its shelf space exposure adds another question mark to its near-term prospects.

Related Links:

Kroger's Turnaround: No One Said This Was Going To Be Easy

Has Kroger Shelved Its Sales Struggles? A Q2 Preview

Market News and Data brought to you by Benzinga APIs
Comments
Loading...
date
ticker
name
Price Target
Upside/Downside
Recommendation
Firm
Posted In: Analyst ColorDowngradesPrice TargetCommoditiesTop StoriesMarketsAnalyst Ratingsfoodfood stocksFood SuppliersGroceryGrocery storesMichael Laveryretailers
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!