Rebounding from a tough middle half of October, shares of food manufacturer Kellogg (K 62.10, +3.23) trade about 5.5% higher this afternoon due mostly to its strong quarterly sales and earnings.
Highlighting that the quarter played out as expected, Kellogg reported Q3 earnings of $1.05 per share on revenues which rose less than one percent to $3.27 billion.
The company noted that on a year-over- year basis, sales were lower due to the list-price adjustment and other impacts from transitioning out of DSD in U.S. Snacks, and remained pressured by softness in the health and wellness segment of the cereal category in the U.S. However, key elements of an improving second-half net sales performance took shape as anticipated, including the return to promotional activity and growth for Pringles in Europe; a return to growth in North America Other, led by accelerated consumption growth in Frozen Foods; and sequential improvement in Special K's global performance. Additionally, productivity savings accelerated with the closing of the DSD system in U.S. Snacks.
Breaking it down a bit further, North America's net sales in the third quarter decreased on a reported and currency-neutral comparable basis, principally as the aforementioned list-price adjustment and other impacts related to the transition out of DSD in U.S. Snacks, as well as continued consumption softness in U.S. cereal in traditional retail channels. The Region continued to make progress against key strategic priorities to improve future sales performance, and in the quarter North America Other stood out for its accelerated consumption and net sales growth. In North America, Snacks and Morning Foods posted lower net sales while Specialty Channels and sales reported as ‘Other’ posted increases.
Kellogg’s Europe segment posted higher reported net sales, due to favorable currency translation. Net sales declined modestly on a currency-neutral comparable basis, a sequential improvement in performance driven by a return to growth for Pringles across the Region, continued stabilization of cereal consumption in the U.K., and growth in emerging markets like Russia; these factors largely offset the impact of soft cereal consumption in Continental Europe.
In Latin America, reported net sales increased due to the December 2016 acquisition of Parati in Brazil, while currency-neutral comparable net sales were down because of continued economic softness and hurricane-related disruption in the Central America & Caribbean sub-region. These factors masked continued growth in Mexico and the rest of the Region.
Reported and currency-neutral comparable net sales in Asia Pacific increased, led by continued broad-based growth in Asia, sustained momentum in Pringles across the Region, and stable sales in Australia, where the company’s cereal business again grew share. Asia Pacific increased its operating profit and operating profit margin strongly on a reported and currency-neutral comparable basis. Not included in Asia Pacific's consolidated results is the performance of the company's joint ventures in West Africa and China, both of which continued to grow net sales and operating profit on a reported and currency-neutral comparable basis.
As for guidance, Kellogg reaffirmed its prior guidance for currency-neutral comparable net sales, operating profit, earnings per share and cash flow. To that end, Kellogg continues to forecast a decline in currency-neutral comparable net sales of about (3%) in 2017, with no change to its estimates for the DSD exit's impact or for the rest of the business. Further, the company still expects to finish the year with 7-9% year-over-year operating profit growth. The company's currency-neutral comparable operating profit margin remains on pace to improve by approximately 350 basis points from 2015 through 2018. Earnings per share guidance was also reaffirmed between $4.03-4.09 and continues to see cash flow of about $1.6-1.7 billion, which after capital expenditure translates into cash flow of $1.1-1.2 billion.