Kellogg (K 69.54, +0.11, +0.16%) found support in its 50-day simple moving
average (67.92) after the company reported better than expected second quarter
results while management highlighted a lower tax rate as impetus for raising
its FY2018 earnings guidance.
Parsing out the better than expected second quarter results, Kellogg reported adjusted earnings per share of $1.14 mainly due to lower restructuring charges, favorable mark-to-market adjustments, and a one-time net accounting gain related to the company’s transaction in West Africa.
Additionally, revenue growth of 5.8% to $3.36 bln was enough to beat the market expectations for the quarter, attributed partly to the acquisition of RXBAR (October 2017) and the consolidation of Nigerian distributor Multipro (May 2018), which collectively contributed 6.7 points of growth on a currency-neutral basis. Currency translation on sales for acquisitions and for the rest of the company deducted net 0.4 percentage point, owing to the strengthening of the U.S. dollar against key currencies. On an organic basis, net sales decreased by 0.4%, as underlying growth for the business was more than offset by the previously announced list-price adjustments and other impacts in U.S. Snacks related to its transition from Direct-Store Delivery (DSD).
- Kellogg’s largest segment as a portion of overall revenues, U.S. Snacks, saw net sales decline 8.6% to $745 mln; Kellogg attributed most of the decline to the list-price adjustment and rationalization of SKUs that were related to last summer's transition out of its DSD distribution system. Management noted that in the second quarter, this DSD-exit impact on net sales was again greater than the segment's overall decline, suggesting a fourth consecutive quarter of improving underlying growth to go with increasing in-market velocities that are a lead indicator of future share performance.
- Sales in the U.S. Morning Foods segment’s also fell on a year/year basis, down 3.2% to about $643 mln. The company highlighted that cereal consumption declines have moderated and stated that the segment's operating profit declined on a reported and adjusted basis on lower net sales, higher commercial investment, and lapping year-ago growth.
- The company’s smallest segment by percentage of overall revenues, U.S. Specialty Channels, performed the best in the second quarter. The segment saw net sales up 1.1% year/year to about $277 mln, led by performance in the vending and convenience channels. Operating profit declined due to a change in cost allocations this year between U.S. operating segments.
Given its good first half momentum, as well as new tax-rate favorability, Kellogg chose to update its guidance as follows:
- The company is raising its net sales growth outlook to +4-5% on a currency-neutral basis. This increase, nudged up from previous guidance of +3-4%, primarily reflects stronger-than-expected organic growth in the first half of the year. The new guidance implies that full-year organic net sales will be flat to down 1%, which still includes a negative impact of 1% from U.S. Snacks’ DSD transition, including its list-price adjustment and rationalization of SKUs. Acquisitions, namely RXBAR and Multipro, are still expected to account for 4-6 percentage points of growth.
- Kellogg also raises its adjusted EPS growth outlook to +11-13% on a currency-neutral basis. This increase in guidance, from previous guidance of 9-11%, is related to various incremental tax benefits, including the benefit related to the second quarter’s pension contribution. Specifically, the company’s effective tax rate is now expected to be 18-19% in 2018.
- Management also reaffirmed its guidance for adjusted operating profit growth of +5-7% on a currency-neutral basis.
- Management commented that Q3's operating profit may be flattish while Q4 should be up strongly as it laps last year's sizable ramp up in brand building.
Shares of Kellogg have recovered the 50-day SMA after giving up that level earlier in the session. The stock is now seeing very slight gains after falling 3.8% at today’s lows. Even so, after notching a YTD high on July 26 (72.26), shares have lost nearly 4%.