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Is Kellogg the Right Pick for Your Portfolio?

May 20, 2014 | About:
Suravi Thacker

Suravi Thacker

1 followers

The cereal provider Kellogg (K) has been witnessing declining sales in its breakfast segment as customers reduce their cereal consumption. The cereal maker posted yet another quarter, which failed to make investors happy, making its share price fall.

Analyzing the Results

Revenue for the quarter stood at $3.74 billion, a decline of 3% over last year. The top line was below the estimate of $3.82 billion. Revenue was affected by 3.5% lower volumes as well as unfavorable currency movements of 0.7%. However, these factors were partially offset by a 1.1% increase in price.

Sales from North America plunged 2.9% over the prior year, mainly because of weakness in cereal sales. The company faces stiff competition from other private label brands which offer healthier alternatives at a comparatively lower price. Also, other breakfast products such as frozen sandwiches are stealing away customer attention.

Further, International sales also witnessed decline this time as factors such as Mexico’s new food tax hampered sales. However, Kellogg was able to register a better bottom line mainly because of its cost-cutting measures.

Earnings stood at $1.01 per share as against the estimate of $0.98 per share. The retailer had undertaken a restructuring program in November last year, named as “Project K,” which plans to reduce costs by cutting workforce by 7% and making resources closely available to the plants.

A Host of Efforts Undertaken

Although the cereal maker is facing a large number of problems in selling its products, it has formulated some strategies to overcome it. It has made its packaging attractive, ramped up its marketing efforts and has increased advertisements in stores in order to boost cereal sales.

The advertisements show cereal as a high protein breakfast, especially when had with milk. Also, it stresses on its great taste when had with coconut milk or almonds. Another benefit of having cereals focuses on health conscious customers as it highlights that it comes directly from the farm and has no artificial ingredients in it.

Moreover, cereal is also shown as a snack option at any time of the day. The company highlights cereals as a late night snack and should not only be used for breakfast. In fact, consumption of cereals apart from breakfast time has jumped to 30%, from 20% a decade ago.

Additionally, the food retailer has introduced a new beverage, which contains all the nutrients of a bowl of cereal. This drinkable cereal should be able to entice customers since it is easy to consume in the morning hours. Even peer General Mills has introduced a similar product, providing stiff competition to the retailer.

Further, Kellogg plans to boost its Kashi brand by introducing new products such as Non-GMO verified products. This should attract people who look for natural and organic foods which are healthier.

Summary

Kellogg seems to be undertaking a number of initiatives to stir demand for cereals as well as other products. Its marketing efforts look interesting. Also, its new products should be able to lure customers, resulting in higher sales. Its cost cutting program should also be fruitful, resulting in lower costs and higher bottom line. Moreover, it has reaffirmed its guidance for the year, despite expecting declining sales in the coming months. However, competitive pressures from other private label brands are a matter of concern. Therefore, investors should not jump into this company unless it starts showing signs of improvement.


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