What Drove Kellogg’s Better-than-Expected 1Q17 Results?

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Part 5
What Drove Kellogg’s Better-than-Expected 1Q17 Results? PART 5 OF 6

How Did Kellogg’s Margins Look in 1Q17?

Cost savings drove margins

Similar to many of its peers, Kellogg (K) is focusing on lowering costs and generating productivity savings to boost profitability amid a slow-growth environment. The company has implemented Project K and ZBB (zero-based budgeting) to drive efficiency and effectiveness. The company plans to generate about $600 million to $700 million in annual cost savings through 2019 from these initiatives.

How Did Kellogg&#8217;s Margins Look in 1Q17?

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Margins improved in 1Q17

Kellogg’s comparable gross margin (excluding the impact of Venezuela operations) expanded 20 basis points to 38.3% in 1Q17, reflecting lower input costs and incremental productivity and cost savings from its Project K program and zero-based budgeting. The impact from these initiatives more than offset lower volumes and increased business investments.

In comparison, Kraft Heinz’s (KHC) reported gross margin remained flat at 36.2% in 1Q17 as cost savings were offset by soft sales and adverse currency movements. Meanwhile, General Mills’ (GIS) adjusted gross margin increased 20 basis points during its fiscal 3Q17.

Kellogg’s comparable operating profit margin expanded 93 basis points to 16.2% during 1Q17. Excluding the impact of foreign currency, the company’s comparable operating margin expanded 110 basis points driven by efficiencies and savings across all its regions. In comparison, Mondelēz (MDLZ) posted a 90-basis-point improvement in its adjusted operating margin during the last reported quarter.

Despite a slowdown in sales, the company expects to generate 4.6%–6.6% growth in its comparable operating profit, reflecting productivity and cost savings from its Project K and ZBB program. On a currency-neutral basis, management expects operating profit to increase in the range of 7%–9% YoY.

Investors can get indirect exposure to Kellogg through ETFs such as the Consumer Staples Select Sector SPDR ETF (XLP), which invests 1.1% of its portfolio in the company.


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