What Could Hurt Kellogg Stock?
Kellogg (K), like most of its peers, is seeing lower sales, as volumes have fallen on account of weak demand and currency fluctuations. Kellogg is struggling in North America as a slowdown in demand for packaged foods is leading to lower volumes. During the last reported quarter, the company’s sales fell 2% on a constant currency basis in this region. Segment-wise, the company’s US Morning Foods and Snacks segment saw muted growth, reflecting sluggish demand and lower promotions. Though the company’s international business is witnessing growth, currency headwinds remain a drag.
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Despite lower sales, Kellogg has managed to improve profitability thanks to its restructuring initiatives aimed at reducing costs. The company’s adoption of the zero-based budgeting technique and project K initiative is resulting in incremental productivity and cost savings, which more than offset the negatives arising from volume deleverage.
Sales to fall in coming quarters
Kellogg’s sales are expected to benefit from innovative product launches and Pringles’ return to growth in Europe during the second half of the year. Moreover, the company’s planned shift from direct store delivery to a warehouse distribution model could lower costs, thus resulting in accelerated EPS growth.
However, continued volume declines in the US (SPY), increased competition, the challenging retail landscape, and currency headwinds would lower sales and restrict the stock’s recovery.
The company’s management expects a 3% decline in sales for 2017 on a constant currency basis, reflecting soft product demand.