Kellogg Raises Forecast After Cost Cutting Bolsters Profit

Updated on
  • Company has adopted popular zero-based budgeting approach
  • Growth of Pringles helps make up for soggy cereal market

Kellogg Co., the world’s largest cereal company, raised its annual earnings forecast after its cost-cutting program helped make up for a slumping breakfast business.

Profit will be $4.11 to $4.18 a share this year when removing the effects of currency, the Battle Creek, Michigan-based company said in a statement Thursday. It had previously projected $4 to $4.07 a share.

Kellogg’s move to embrace zero-based budgeting -- an increasingly popular form of cost cutting in the food industry -- is boosting its margins. The company also benefited from growth of Pringles potato chips and a less-dire-than-expected business in Venezuela, which has suffered from runaway inflation.

“We’re making good progress on our priorities,” Chief Executive Officer John Bryant said in the statement. The belt-tightening programs are “contributing to more profit-margin expansion than we previously anticipated,” he said.

The stock rose as much as 3.7 percent to $84.10 in New York trading after the results were posted, marking the biggest intraday jump in more than a month. It had already gained 12 percent this year through Wednesday.

Cereal Slump

Last quarter, profit was 91 cents a share, excluding some items, which matched analysts’ estimates. But sales fell more than 6 percent to about $3.26 billion in the quarter, worse than the average projection of $3.36 billion.

Kellogg is still trying to turn around its struggling morning-foods division, which has been hurt by a prolonged slump in U.S. cereal sales. The company, known for brands like Special K and Froot Loops, said the category can stem its recent declines this year as adults embrace the breakfast staple as a snack.

Bryant said the company’s cereal slowdown is largely because of the Special K brand, which has been hurt as dieters shift to a more holistic view of wellness, instead of merely counting calories. Improving Special K will be key to reviving the cereal unit, Bryant said.

In the 13 weeks ended July 10, cold cereal sales dropped 1.4 percent in the U.S. compared with the same period a year earlier, according to data compiled by Bloomberg Intelligence. Cereal sales have been sliding since 2013 and are expected to continue dropping at least through 2020, according to Euromonitor.

Gluten Free

General Mills Inc., Kellogg’s biggest cereal rival, has worked to boost sales by adding gluten-free Cheerios and removing artificial colors and ingredients from products such as Trix and Reese’s Puffs. Overall, its cereal sales slipped 1 percent in the fiscal year that ended May 29, but started to turn positive in recent months, according to the company.

Kellogg also is trying to make its products more natural. The company has said that 75 percent of its cereals in North America are made without artificial colors, while more than half are produced without artificial flavors. Kellogg has vowed to rid the ingredients have from its cereals and snack bars by the end 2018.

Kellogg has been mentioned as a potential takeover target amid consolidation among large U.S. food producers. With 3G Capital -- the private equity firm known for its cost-cutting zeal, in charge at Kraft Heinz Co. -- there’s been increased pressure on food companies to improve margins. Kellogg is now targeting as much as $280 million in total cost cuts this year. The company said the potential savings from the switch to zero-based budgeting may be as much as $180 million, up from an earlier projection of $100 million.

“The savings we’re seeing are in line with what other companies have achieved,” Bryant said in an interview. “When we first gave guidance, we were being a little conservative.”