What’s behind Kellogg’s Disappointing 1Q Sales?
Weak consumption trends
Kellogg’s (K) 1Q17 sales of $3.3 billion missed the Wall Street consensus estimate and fell 4.1% YoY (year-over-year). Volumes fell 5.7% due to a downturn in category-wide consumption in the US (SPY) and Europe. Meanwhile, adverse currency movement more than offset higher pricing.
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Most major food brands also witnessed tepid sales in their last reported quarter due to sluggish consumer uptake in January and February on account of delayed tax refunds and a shift in the holiday calendar. Kraft Heinz’s (KHC) 1Q17 sales fell 3.1% YoY, reflecting weak volumes. General Mills (GIS) and Mondelēz International (MDLZ) posted sales declines of 5.2% and 0.6%, respectively, as higher pricing was more than offset by lower volumes and adverse currency movement.
What the future holds
Given the soft start to the year, management expects its top line to fall 3% in 2017. However, sales are projected to improve sequentially in coming quarters on the back of improvement in consumption trends. Management noted that there were signs of improvements in consumption in March and April. Moreover, other factors that negatively affected the shipments in 1Q17 are likely to abate, which will further accelerate sales growth.
The company remains hopeful that its innovative and renovated product pipeline will further support sales growth. Its newly launched nut butters and its renovated frozen (Eggo brand) and cereal (Bear Naked brand) businesses are witnessing early signs of growth.
Plus, Kellogg is expanding into emerging markets, which could drive long-term sales growth. Meanwhile, the company is also strengthening its distribution through the omnichannel approach and focusing on high-frequency stores to ramp up volume growth.
Despite the upbeat guidance, the consumer shift towards healthy and fresh food and adverse currency movements are likely to remain a drag and will continue to hamper sales growth in the coming quarters.