Will Lower Sales Adversely Impact Kellogg's (K) Q3 Earnings?

Kellogg Company (NYSE:K) is set to report third-quarter 2017 results on Oct 31 before the opening bell.

Kellogg has been witnessing top-line weakness for the last two years, primarily due to lower demand. Particularly, weak performance of its cereal products in developed markets as well as soft U.S. snacks business has been negatively impacting the company.

Kellogg, much like a number of other U.S. food producers such as General Mills Inc. (NYSE:GIS) , The Kraft Heinz Company (NYSE:K) , Mondelez International, Inc. (NASDAQ:MDLZ) , has been struggling due to the shift in consumer preference toward natural and organic ingredients over packaged and processed food. This trend is unlikely to change in the to-be-reported quarter and Kellogg expects its top line to remain subdued in 2017.

Nonetheless, given the tepid sales growth, the company is making aggressive efforts toward improving its food offerings. The company is investing in brand building, in-store capabilities along with product and packaging innovation. The company’s sales in the second half of 2017 are expected to somewhat benefit from innovation and Pringles’ improved performance in Europe. Again, the company’s sales in Brazil are likely to benefit from the Parati acquisition. Mexico and Australia’s sales are likely to be higher owing to better shipments and improvement in pricing and mix.

As per the Zacks Consensus Estimate, Kellogg’s total North America segment’s revenues are expected to witness a 0.04% decline in the third quarter. Europe revenues are likely to witness a decline of 0.01%. However, Latin America as well as Asia Pacific revenues are likely to register 0.2% and 0.03% growth in the quarter, respectively.

Overall, for the third quarter, the Zacks Consensus Estimate for total revenues is pegged at $3.2 billion, implying a 1.2% decline.

However, cost-savings initiatives like Project K and zero-based budgeting (ZBB) program are somewhat compensating for the weakness in sales. Although the top line has been weak, Kellogg’s margin growth has been impressive. Pricing and mix improvement is anticipated to give support to its bottom-line growth. Currency headwinds are also expected to diminish, thereby further supporting EPS growth.

Overall, for the third quarter, the Zacks Consensus Estimate for earnings is pegged at 93 cents, reflecting a 2.8% year-over-year decrease.

Kellogg Company Price and EPS Surprise

Kellogg Company Price and EPS Surprise | Kellogg Company Quote

Here is what our quantitative model predicts:

Kellogg has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — which is required to be confident of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for Mondelez is +0.50%.

Zacks Rank: Kellogg carries a Zacks Rank #3, which increases the predictive power of ESP.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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