The morning breakfast industry in the U.S. has changed a lot in the last couple of years. This has affected sales of retailers who sell traditional types of breakfast. For instance, the cereal providers have had a tough year since people now have a large variety of breakfast alternatives to choose from. Thus, Kellogg’s (K, Financial) share price has dropped 6% since the beginning of this year. Its recently reported fourth quarter numbers failed to please the investors as it was below the Street’s estimates. Let’s discuss.
The inappropriate numbers
Revenue for the quarter was up 0.3% to $3.51 billion, over last year. The slight increase in the top line was mainly due to the difference in shipping days. However, the analysts were expecting sales to be at $3.65 billion. If we exclude the effect of extra shipping days this time, sales dropped 2.2% organically. A decline of 2.3% in volumes, partly offset by an increase of 0.1% in the price mix, resulted in lower revenue.
One of the primary reasons for lower sales was the weakness in the U.S. cereals business, which makes 40% to 45% of the total revenue. Also, there is a slowdown in the International markets such as, Europe and Asia Pacific.
The bottom line too has dropped 1.2% to $0.84 per share, as compared to the previous year. However, analysts’ estimates stood at $0.92 per share. Earnings were lower mainly because of weak revenue and higher investments to make the brand grow stronger. Also, the company was hurt by currency headwinds, which affected the bottom line by $0.02 per share.
Nonetheless, the cereal retailer is focussed on its Project K restructuring program, which is aimed to reduce costs by $100 million per year. The program plans to reduce the workforce and close down the underutilized factories.
The key concern
Kellogg is suffering because of the shift in customers’ preference from a dieting plan to a plan for health and wellness. Thus, demand for products such as Special K has dropped. Moreover, it faces stiff competition from other breakfast options such as eggs, smoothies, yogurt and peanut butter. Therefore, customers have shifted from a sit-down breakfast with higher protein, lower carbohydrate options which are easier to have.
By the geographies
Sales from North America has surged 2.3% to $2.3 billion, over last year. However, organic sales dropped 3.9% due to a decline in demand for cereals and snacks, resulting in 3.5% lower volumes.
The U.S. morning food business and the U.S. snacks business also dropped 7.7% and 3.1%, respectively, due to weak demand. International sales were dragged down by a decrease of 1.2%, 7.2% and 1.2% in Europe, Latin America and Asia Pacific, respectively.
Future insights
Kellogg has come up with a number of initiatives to overcome the problems of lower demand. Therefore, products such as non-GMO Kashi cereals, gluten-free versions of products and Special K with more protein have been introduced. Also, it has been redesigning its marketing plan and the packaging of its products in order to attract customer attention.
Further, it has been promoting cereals in grocery stores and has come up with new cereals based on the Disney movie “Frozen.” Demand for such products, including Pringles, is on the rise.
The bottom line
The provider of ready-to-eat cereals and convenience food is probably having the toughest time possible. However, it has been managing its way out through various kinds of initiatives. Its restructuring program and many strategic efforts to attract customers should be helpful. But, lowered organic growth guidance for the year is a matter of concern. Hence, investors should keep away from this company right now.
