Changing Consumer Tastes Takes Bite Out of Kellogg’s Sales
05 May 2017 --- Kellogg Company has been feeling the slowdown in demand for packaged foods as consumption trends change, and has adjusted its sales forecasts for full-year forecasts as a result. Reporting its first quarter results, Kellogg Company reported a net income of US$262.0 million, or 74 cents per share, up from US$175.0 million, 49 cents per share, for the same period last year.
Revenue totaled US$3.26 billion, compared to US$3.40 billion for the same period last year and adjusted EPS was US$1.06.
Kellogg’s first quarter earnings per share increased by 51% from the prior-year quarter, due to year-ago interest costs related to a bond tender and a lower tax rate, partially offset by higher upfront costs related to the Project K restructuring program and adverse currency translation.
Non-GAAP, comparable earnings per share were up more than 10% from the year-earlier quarter, because of productivity savings and a planned discrete tax benefit, which more than offset the negative impact of currency translation. Non-GAAP, currency-neutral comparable earnings per share increased by more than 13% year-on-year.
“In the first quarter, we managed through an unusually challenging environment for packaged food companies, including a period of industry-wide softening of consumption trends,” said John Bryant, Kellogg Company’s chairman and chief executive officer.
“We got off to a slow start on net sales, as mentioned previously, but we expect sequential improvement in coming quarters, and our productivity initiatives enabled us to stay on track toward our full-year 2017 forecasts for currency-neutral comparable operating profit, earnings and cash flow.”
“We continue to make progress on our 2020 Growth Plan, which directly addresses many of the revenue headwinds we are presently facing, and we have good visibility into continued currency-neutral operating-profit margin expansion.”
According to the company, quarterly reported operating profit decreased because of higher restructuring charges related to the Project K restructuring program, which includes this year's exit from Direct Store Delivery sales and delivery system. Currency-neutral comparable operating profit increased because of efficiencies in Cost of Goods Sold and Selling General and Administrative expenses related to Zero-Based Budgeting and Project K, driving currency-neutral comparable operating profit-margin expansion across all four of our Regions.
Soft Start to the Year
Latin America and Asia-Pacific regions and parts of North America performed largely as expected, says Kellogg Company. However it’s US Morning Foods, US Snacks, and Europe region got off to a soft start to the year and it was in these businesses that the company saw “a meaningfully lower-than-trend net sales and operating profit performance.”
While this weighed down overall results, as previously indicated, many of their underlying negative factors were largely concentrated in Q1.
An industry-wide softening of consumption trends impacted most of Kellogg’s North America segments in January and February, compounded by trade-inventory reductions from the previous quarter.
But the company is expecting that innovations planned for Special K and Mini Wheats cereals for the second quarter will be a hit with consumers.
On snacks, the segment posted a decline in net sales, on both a reported and currency-neutral comparable basis which the company says, alongside higher up-front costs related to Project K restructuring, drove a decrease in reported and currency-neutral comparable operating profit.
However, the company gained share in Crackers, led by its collective “Big 3” brands. It also gained share in other supported brands, like Rice Krispies Treats and Keebler cookies. In addition, it made good progress on preparing for its transition from Direct-Store Delivery to its Warehouse distribution system.
The North America Other segment, which is comprised of the US Frozen Foods, Kashi, and Canadian businesses, posted a decrease in reported and currency-neutral comparable net sales, due to the unusually soft category-wide consumption in January and February for Frozen, trade inventory reductions in Kashi, and price elasticity impact in Canada. On a reported and currency- neutral comparable basis, the segment's operating profit and operating-profit margin increased strongly in the quarter. Performance improved in March, and stronger commercial plans are in place for Q2.
Meanwhile, Kellogg Europe posted a decrease in reported net sales and currency-neutral comparable net sales. The company says that on top of a persistently challenging environment in the U.K., Europe's results in Q1 were further affected by since-resolved customer negotiations related to pricing actions. Operating profit declined on a reported basis and currency-neutral comparable basis, due to the sales decline and adverse currency translation, but reported and currency-neutral comparable-basis profit margins continued to increase. Kellogg Europe expects sequentially improved performance as the year progresses.
Looking ahead and taking into consideration the slow start in Q1, and to reflect only moderate improvement in developed markets recent consumption trends, the company now forecasts a decline in currency-neutral comparable net sales of about 3% in 2017, versus previous guidance of approximately 2%.
