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Kellogg’s Reduced EPS Guidance Hurt Its Stock

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Kellogg’s third-quarter results

On October 31, Kellogg (K) shares fell more than 7% after the company reported its third-quarter results. Kellogg’s top line was slightly ahead of analysts’ expectations. The company’s top line continued to benefit from its RXBAR acquisition and the consolidation of Multipro’s operations. However, lower pricing and SKU rationalization remained a drag. The company’s organic sales rose 0.4%, which wasn’t impressive.

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Kellogg’s margins remained challenged. Higher packaging and shipping costs and lower pricing took a toll on the company’s margins. Kellogg’s adjusted EPS was in line with analysts’ expectation. Benefits from higher sales and the lower effective tax rate were offset by lower pricing, cost headwinds, and higher interest costs related to the debt taken to finance the company’s acquisitions.

Kellogg’s lower guidance on the earnings front didn’t sit well with investors. Kellogg reduced its adjusted EPS growth guidance for 2018. Kellogg expects its adjusted EPS to grow 7%–8% on a constant currency basis—down from its earlier growth guidance of 11%–13% on a currency neutral basis.

Higher interest expenses, lower pricing, and increased packaging and logistics costs are expected to hurt the company’s bottom line. Notably, food companies like Kellogg, Hershey (HSY), General Mills (GIS), J.M. Smucker (SJM), and Conagra Brands (CAG) have acquired fast-growing brands to accelerate their sales growth. However, the interest costs related to funding the acquisitions are taking a toll on the EPS growth rate. Meanwhile, costs headwinds also remain a drag.

Key financials

Kellogg reported net sales of $3.5 billion, which increased 6.8% on a YoY (year-over-year) basis and exceeded analysts’ expectation. Kellogg’s gross margin fell by 270 basis points to 35.6%. The operating margin contracted by 150 basis points to 13.6%, which reflects lower pricing, a negative mix, cost headwinds, and brand building investments.

Kellogg’s adjusted EPS of $1.06 was in line with analysts’ expectation and increased 2.9% on a YoY basis, which reflects a steep deceleration in its growth on a sequential basis.

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