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

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

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

EPS exceeded analysts’ estimates

Kellogg (K) reported its 1Q17 results on May 4, 2017. As expected, weak consumption, mainly in the US (SPY), remained a drag. The company’s adjusted EPS (earnings per share) of $1.06 came in ahead of Wall Street analysts’ consensus estimate of $0.99 and rose 10.4% YoY (year-over-year) on the back of incremental cost savings, which more than offset the decrease in volumes.

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

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As can be seen in the graph above, Kellogg has exceeded analysts’ earnings expectations in the past three quarters despite a challenging environment.

Cost savings and tax benefits drove EPS

Kellogg’s restructuring program helped the company post better-than-expected bottom-line results in 1Q17. Plus, a fall in interest and other financial costs and a significantly lower effective tax rate further boosted the strong EPS growth.

Similar to most of its peers, Kellogg is witnessing volume declines in the midst of a slow-growth environment. Meanwhile, the strong US dollar continues to dent the company’s profitability. Amid such a scenario, packaged food manufacturers have turned towards lowering costs and generating productivity savings to drive bottom-line growth.

The company’s peers Kraft Heinz (KHC), Mondelēz International (MDLZ), and Conagra Brands (CAG) are working to drive costs down to remain afloat. Rival Kraft Heinz reported its 1Q17 results on May 3 and posted a 15.1% increase in its adjusted EPS driven by cost-cutting initiatives. Meanwhile, Mondelēz International reported a 3.9% growth in its bottom line in 1Q17, reflecting lower costs.

Outlook

Despite starting the year on a softer note, the company projects its adjusted EPS to be in the range of $3.91–$3.97, reflecting a YoY growth of 4.5%–6.1%. Kellogg expects its top line to improve in coming quarters, especially in the second half of the year, with innovative products and recovery in consumption trends that could help drive EPS growth. Moreover, productivity savings and projected lower tax rates will further bolster bottom-line growth.

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