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Why Kellogg’s 3Q17 Sales Surpassed Estimates

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Reported sales returned to growth

Kellogg’s (K) 3Q17 sales of $3.3 billion came in ahead of analysts’ consensus estimate, rising 0.6% YoY (year-over-year) and driven by the Parati acquisition and favorable currency rates. However, a weak cereal consumption trend, mainly in the United States (SPY), continued to hurt volumes and, in turn, overall sales.

Kellogg’s volumes marked a sequential improvement but fell 1.6% YoY during the quarter. That reflected the challenges across most of the markets except Asia Pacific, which saw volume improvements. Price adjustments related to the DSD (direct-store delivery) transition further pressured its top-line growth rate.

The company’s Parati acquisition in Brazil and the return to growth for Pringles in Europe supported its sales growth rate. Its kids-oriented brands, including Frosted Flakes and Froot Loops, continue to generate a higher demand.

In comparison, peers General Mills (GIS), Kraft Heinz (KHC), Campbell Soup (CPB), Conagra Brands (CAG), and JM Smucker (SJM) are also witnessing soft sales due to tepid demand. But the top line for food companies is expected to benefit from favorable currency rates in the coming quarters.

Hershey (HSY) and Mondelēz (MDLZ) posted increased sales during the last reported quarter, thanks to improved volumes and higher pricing.

Outlook 

Kellogg reaffirmed its 2017 sales guidance and projected a 3% fall in sales on a constant currency basis. Its 4Q17 sales are expected to benefit from the Parati acquisition and strength in the U.S. Frozen Foods category. Improved sales of Pringles in Europe could further support its top-line growth. The company’s focus on in-store activity and higher brand-building investments are also expected to supplement its top-line growth.

However, weaknesses in several markets and increased competitive activity are projected to restrict the company’s top-line growth rate. Volumes gained in 3Q17 from hurricane-related shipments, which won’t be there in 4Q17, resulted in a sequential decline.

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