Kellogg raises full-year guidance on stronger second quarter
Revenue, profit topped expectations despite continued declines in U.S. cereal sales
Kellogg Co. offered a bullish outlook for its annual sales after several sluggish years, but it warned that higher trucking costs and lower prices for its products were eating into profit margins.
The maker of Frosted Flakes and Pop-Tarts said Thursday that in the second quarter, rising demand in emerging markets and strong brands like Pringles and Eggo waffles in the U.S. helped revenue.
But its core U.S. cereal business continued to decline. “Simple label, convenient food. Those are some of the really important trends we see in the U.S. that are helping drive our approach,” Chief Executive Steve Cahillane said in an interview.
Like its peers, Kellogg struggles with Americans’ move away from processed, packaged food for fresher options. At the same time, a truck shortage has inflated costs for distribution industry wide, pinching profitability for big food companies. Several of them, such as General Mills Inc. and Hershey Co., have said they are raising prices to cover the costs, but Kellogg said its prices were generally lower in the latest quarter.
Shares in Kellogg were down 0.3% in midday trading Thursday.
Kellogg has been cutting costs to stave off the rising expenses. However, its adjusted operating profit margin dropped to 14.2% from 15.1% the prior year. Mr. Cahillane said moving the labor in house for new single-serve products will alleviate some margin pressure.
With Americans eating less cereal in recent years, Kellogg has had to rethink its strategy and diversify its brands with deals, including buying RX Bar, a protein bar made with simple ingredients, last year for $600 million.
Mr. Cahillane said that the cereal business in the U.S. is stabilizing and that it is “on the right track.”
Previous attempts to make its cereals appeal to a more healthoriented crowd were too focused on weight loss rather than on the use of simple ingredients and
beneficial nutrients, executives said.
Lately, Kellogg has been correcting that with new products like Special K with probiotics. “Special K was a huge leaky bucket,” Mr. Cahillane said, and now, consumption of that cereal
brand is rising.
The company also doubled down on some of its indulgent cereal brands, hoping a combination of nostalgia among millennials and consumers still devoted to cereal as a dessert or snack would generate interest in Chocolate Frosted Flakes and Froot Loops with marshmallows.
Kellogg said it now sees more potential for its frozen foods in the U.S., including Eggo waffles and Morningstar Farms vegetarian burgers. The frozen-food industry has rebounded this year after years of declines.
In the latest quarter, sales fell 3% in Kellogg’s U.S. morning foods division, which predominantly includes cereal, but rose 18% among its U.S. frozen foods.
Overall, Kellogg’s revenue rose 5.8% to $3.36 billion and profit more than doubled to $599 million. Adjusted to exclude the impact of foreign currency translation and other one-time events, its profit rose 15.5% to $1.12 per share. Both sales and profit topped analyst expectations, according to FactSet.
Kellogg now expects annual revenue to rise by 4% to %5, excluding the impact of foreign currency fluctuation, up from a previous estimate of 3% to 4% growth. It said its earnings per share will increase by 11% to 13%, compared with a prior estimate of 9% to 11% growth.