As of July 20, Kellogg (K) stock has grown 23.9% since it reported stronger-than-expected first-quarter earnings on May 3. The key catalyst behind the stock’s stellar rebound is the company’s improving business trend. Kellogg’s top line in North America suffered from the decline in sales at its snacks and morning food segment, reflecting list price adjustment and SKU rationalization. However, the rate of decrease decelerated sequentially, which is a positive.
Kellogg’s top line in the second quarter is expected to remain under pressure from lower net pricing, aggressive promotion from competitors, and tough retail dynamics. However, the expansion of Pringles, acquisition of RXBAR and Parati, and brand building investments should support the top line growth rate. Moreover, sequential improvement in sales for the snacks and morning foods segment in North America during the second quarter could boost sales and, in turn, the stock.
On the profitability front, Kellogg’s gross margin rate could remain weak, reflecting lower net pricing and promotions. However, the operating margin rate is expected to improve due to strong overhead savings. Operating margin expansion, coupled with a decline in the effective tax, is expected to drive the company’s bottom-line growth in the second quarter of 2018.
However, soft demand for packaged foods and inflation in input and transportation costs are expected to remain a drag.
YTD stock performance
Kellogg stock is up 3.3% on a year-to-date or YTD basis as of July 13 and has outperformed most of its peers. Kraft Heinz (KHC), Hershey (HSY), General Mills (GIS), Conagra Brands (CAG), J.M. Smucker (SJM), and Campbell Soup (CPB) are trading in the red on a YTD basis. The S&P 500 Index (SPX) has grown 4.8%.
Kellogg is expected to announce its second-quarter results on Thursday, August 2. In this series, we’ll look at analysts’ expectations for the second quarter.
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