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Kellogg's (K) Strategic Initiatives Look Good, Sales a Drag
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On Jan 2, 2017, we issued an updated research report on Kellogg Company (K - Free Report) . Although the company’s shares have been trading below the Zacks categorized Food-Miscellaneous/Diversified industry in the last one year period, its cost saving initiatives are a godsend. The stock has gained only 2.9% in the last one year, compared with the 9.4% gain of the broader food market.
Pros
Kellogg boasts a legacy of over 100 years built on solid product portfolio and brand identity in both cereals and snacks. Amid tepid sales growth, the company is making aggressive efforts to improve its food offerings. It is channeling funds toward product and packaging innovation as well as reformulation of many existing products to meet the rapidly changing tastes of consumers regarding health and wellness.
As consumers now prefer food with more nutritional value, such as protein, gluten-free choices and simpler ingredient lists, the company has redesigned the Special K brand in the domestic market and re-positioned it as a healthy lifestyle brand. On these lines, the company launched protein and gluten-free versions of Special K and improved some of its existing products under the Special K brand. Further, in Europe, Kellogg is in the process of re-positioning the brand including product additions and marketing activity. Kellogg is also renovating the Special K snacks brands in the same manner as cereals.
Importantly, the company’s four-year restructuring program, Project K, is expected to spur growth and profitability. The program aims to optimize the supply chain through consolidation of facilities and elimination of excess capacity; improve productivity through consolidation of common processes or business services across multiple regions and functions; and bring a new global focus on categories. Project K generated savings of around $180 million in 2015 and is likely to generate approximately $100 million of incremental savings in the to-be-reported 2016 results. Annual cost savings from Project K are expected to be approximately $425–$475 million by 2018.
The company also initiated an aggressive zero-based budgeting (ZBB) program in 2015 in its North American business to generate savings in addition to that from Project K. The ZBB program is anticipated to generate an added $150–$180 million in savings in 2016 and $450–$500 million over the 2016-2018 period.
With these initiatives in place, Kellogg is expected to witness adjusted profit margin expansion of approximately 350 basis points during 2016–2018 from 2015 levels, reaching approximately 18% by 2018.
Cons
Kellogg has been struggling to boost sales over the past two years mainly due to weak performance in its developed market cereals and U.S. snacks businesses.
Excluding the extraordinary inflationary gains in Venezuela, Kellogg’s organic sales declined 1.6% in the third quarter, 2% in the second quarter and 1% in first-quarter 2016 due to persistent weakness in North America and Europe. North America core sales declined 2.3% in the first nine months of 2016 due to soft U.S. cereals and snack sales. This, in turn, compelled Kellogg to lower its 2016 sales guidance thrice this year.
Nonetheless, though the top line has been weak, Kellogg’s margin growth has been impressive. During the third quarter, operating margin was up 260 basis points due to the favorable impact of the above-mentioned initiatives.
Zacks Rank & Key Picks
Kellogg currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the food space include B&G Foods, Inc. (BGS - Free Report) , Lancaster Colony Corporation (LANC - Free Report) and Ingredion Incorporated (INGR - Free Report) .
Lancaster Colony has a decent earnings surprise history, beating the Zacks Consensus Estimate in three of the last four quarters, the average positive earnings surprise being 8.59%. The stock holds a Zacks Rank #2 (Buy).
Ingredion also has a decent earnings surprise history, beating the Zacks Consensus Estimate in all of the last four quarters, the average positive earnings surprise being 10.47%. The company also holds a Zacks Rank #2.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest tickers for the entirety of 2017?
Who wouldn't? These 10 are painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Be among the very first to see them >>
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Kellogg's (K) Strategic Initiatives Look Good, Sales a Drag
On Jan 2, 2017, we issued an updated research report on Kellogg Company (K - Free Report) . Although the company’s shares have been trading below the Zacks categorized Food-Miscellaneous/Diversified industry in the last one year period, its cost saving initiatives are a godsend. The stock has gained only 2.9% in the last one year, compared with the 9.4% gain of the broader food market.
![](https://staticx-tuner.zacks.com/images/zadmin_tuner_image/k_20170102.jpg)
Pros
Kellogg boasts a legacy of over 100 years built on solid product portfolio and brand identity in both cereals and snacks. Amid tepid sales growth, the company is making aggressive efforts to improve its food offerings. It is channeling funds toward product and packaging innovation as well as reformulation of many existing products to meet the rapidly changing tastes of consumers regarding health and wellness.
As consumers now prefer food with more nutritional value, such as protein, gluten-free choices and simpler ingredient lists, the company has redesigned the Special K brand in the domestic market and re-positioned it as a healthy lifestyle brand. On these lines, the company launched protein and gluten-free versions of Special K and improved some of its existing products under the Special K brand. Further, in Europe, Kellogg is in the process of re-positioning the brand including product additions and marketing activity. Kellogg is also renovating the Special K snacks brands in the same manner as cereals.
Importantly, the company’s four-year restructuring program, Project K, is expected to spur growth and profitability. The program aims to optimize the supply chain through consolidation of facilities and elimination of excess capacity; improve productivity through consolidation of common processes or business services across multiple regions and functions; and bring a new global focus on categories. Project K generated savings of around $180 million in 2015 and is likely to generate approximately $100 million of incremental savings in the to-be-reported 2016 results. Annual cost savings from Project K are expected to be approximately $425–$475 million by 2018.
The company also initiated an aggressive zero-based budgeting (ZBB) program in 2015 in its North American business to generate savings in addition to that from Project K. The ZBB program is anticipated to generate an added $150–$180 million in savings in 2016 and $450–$500 million over the 2016-2018 period.
With these initiatives in place, Kellogg is expected to witness adjusted profit margin expansion of approximately 350 basis points during 2016–2018 from 2015 levels, reaching approximately 18% by 2018.
Cons
Kellogg has been struggling to boost sales over the past two years mainly due to weak performance in its developed market cereals and U.S. snacks businesses.
Excluding the extraordinary inflationary gains in Venezuela, Kellogg’s organic sales declined 1.6% in the third quarter, 2% in the second quarter and 1% in first-quarter 2016 due to persistent weakness in North America and Europe. North America core sales declined 2.3% in the first nine months of 2016 due to soft U.S. cereals and snack sales. This, in turn, compelled Kellogg to lower its 2016 sales guidance thrice this year.
Nonetheless, though the top line has been weak, Kellogg’s margin growth has been impressive. During the third quarter, operating margin was up 260 basis points due to the favorable impact of the above-mentioned initiatives.
Zacks Rank & Key Picks
Kellogg currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the food space include B&G Foods, Inc. (BGS - Free Report) , Lancaster Colony Corporation (LANC - Free Report) and Ingredion Incorporated (INGR - Free Report) .
B&G Foods is expected to witness 42.2% increase in 2016 earnings. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Lancaster Colony has a decent earnings surprise history, beating the Zacks Consensus Estimate in three of the last four quarters, the average positive earnings surprise being 8.59%. The stock holds a Zacks Rank #2 (Buy).
Ingredion also has a decent earnings surprise history, beating the Zacks Consensus Estimate in all of the last four quarters, the average positive earnings surprise being 10.47%. The company also holds a Zacks Rank #2.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest tickers for the entirety of 2017?
Who wouldn't? These 10 are painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Be among the very first to see them >>