What’s Kellogg’s Updated Guidance for Fiscal 2016?

Kellogg (K) updated its fiscal 2016 guidance for currency-neutral comparable net sales, operating profit, and earnings per share—due the better-than-expected performance by its Venezuelan business. Now, the company projects that it will exceed its long-term target of currency-neutral adjusted net sales and operating profit growth in fiscal 2016.

Net sales are expected to grow 4%–6%. It expects the operating profit to increase 11%–13%. Kellogg projects that due to the changes in its business in Venezuela, its fiscal 2016 adjusted net sales growth might be higher than the guidance range.

Kellogg is optimistic that it will generate savings from Project K and zero-based budgeting. This would result in an improved gross margin with a slight adverse effect from deflation. Interest expenses are estimated to be $235 million–$245 million. The adjusted effective tax rate is projected to be 27%–28%.

Incremental savings from Project K are still projected to be ~$100 million in fiscal 2016. Savings through zero-based budgeting are still expected to be ~$100 million. During the first quarter earnings release, the company also reaffirmed that it expects its fiscal 2016 operating cash flow to be ~$1.1 billion. Capital expenditure for the year would include the effect of the cash required by Project K and an increase in capital spending equal to ~1% of sales to support the growth of the Pringles business. Capital expenditure for the year is anticipated to be 4%–5% of sales.

Not included in the guidance for net sales and operating profit are:

• the effect of mark-to-market adjustments
• acquisitions and dispositions
• costs related to Project K
• integration costs
• foreign currency translation
• remeasurement of the Venezuelan business
• other items that could impact comparability

Kellogg’s peers in the industry such as McCormick & Company (MKC), General Mills (GIS), and WhiteWave Foods (WWAV) reported a gross margin of 40.7%, 35.1%, and 34.0% in their last reported quarter, respectively. The PowerShares S&P 500 Quality Portfolio (SPHQ) invests 0.84% of its holdings in Kellogg.

In the next part of this series, we’ll look at what analysts recommend for Kellogg before its fiscal 2Q16 earnings.