Kellogg (K) Gains From Cost-Saving Initiatives, Sales Weak

Kellogg’s (NYSE:K) cost savings from its Project K and zero-based budgeting (ZBB) plans have been supporting margins. In 2017, operating margin was at a favorable 440 basis points (bps), courtesy of savings realized from Project K and ZBB initiatives which more than offset investment in food and packaging as well as the operating leverage impact of lower volume.

Project K aims to optimize the supply chain through consolidation of facilities and elimination of excess capacity; improve productivity through consolidation of common processes across multiple regions and bring a global focus on categories. The savings are being invested in brand-building initiatives, in-store execution, sales capabilities and innovation to stabilize sales. Kellogg expects $600-$700 million in Project K cost savings through 2019.

The company also started an aggressive zero-based budgeting (ZBB) program in its North American business to generate savings. The ZBB program is projected to generate $450-$500 million in 2016-2018.

Kellogg expects to realize more than half of the remaining Project K savings and the remaining ZBB savings in 2018. A part of this savings will be used to cover modest cost inflation due to rising transportation cost. A good portion of this will be reinvested into its brands.

Cost-saving initiatives have helped Kellogg fight persistent decline in sales. Kellogg has been struggling with tepid sales over the past few years mainly due to weak performance of cereals and U.S. snacks businesses. North America core sales declined 2.6% in 2017 due to soft U.S. cereals and snack sales. Europe’s net sales also deteriorated 3.6% in the period. Overall, the company’s net sales declined 0.7% with volumes declining 3.1% as a result of soft consumption trends across most categories.

Apart from aggressive cost-saving initiatives, Kellogg is also undertaking measures to improve food products. It is channeling funds toward product and packaging innovation and reformulation of many existing products to meet the rapidly changing views of consumers regarding health and wellness.

Kellogg claims that 75% of its cereals contain no artificial colors, while more than half are made without artificial flavors. Further, it is striving to remove artificial colors and flavors across the Kellogg branded cereals, a variety of Kellogg's branded snack bars and Eggo frozen foods by the end of 2018.

Bottom Line

In the past few quarters, the company’s sales have been reeling under persistent weakness in North American and Europe. Kellogg’s shares have lost 6.2% in the past year. Nonetheless, the company is leaving no stone unturned to reinvigorate investors’ optimism and regain footing through cost-saving initiatives, innovations and diversifications.

Zacks Rank & Stocks to Consider

Kellogg carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader Consumer Staples sector are Post Holdings, Inc. (NYSE:POST) , United Natural Foods, Inc. (NASDAQ:UNFI) and US Foods Holding Corp. (NYSE:USFD) . The stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Post Holdings is expected to witness 69.3% growth in 2018 earnings.

United Natural Foods is expected to see 8.6% growth in fiscal 2018 earnings.

US Foods Holding is likely to witness 48.6% earnings growth in 2018.

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