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Why Kellogg’s Earnings Are Projected to Decline in 2019

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What affected Kellogg’s Q4 EPS?

In the fourth quarter, Kellogg (K) reported adjusted earnings of $0.91 per share, which came in ahead of analysts’ expectations of $0.88. However, the fourth-quarter EPS fell 2.2% on a YoY basis. Kellogg’s DSD exit adversely impacted pricing, and in turn, its EPS growth rate. Meanwhile, weakness in organic volumes further remained a drag.

In addition, inflation in commodities, higher packaging costs, and a mix shift toward low margin categories and markets further lowered the bottom line. Also, the consolidation of its Multipro operations and higher brand investments negatively impacted the margins, and in turn, its fourth-quarter EPS.

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The bottom line of the company’s peers including General Mills (GIS), Hershey (HSY), Conagra Brands (CAG), and J.M. Smucker (SJM) are gaining from the decline in the effective tax rate following US tax reforms. However, high costs and brand investments continue to hurt the company. Also, an increase in interest costs related to the funding of its recent acquisitions is further pressuring the bottom line.

Outlook

Kellogg’s management expects its 2019 adjusted EPS to decline by 5% to 7% on a constant currency basis. Increased investments in packaging and advertising coupled with inflation in commodity costs are likely to remain a drag. Also, weak pricing and an adverse mix are expected to hurt its EPS in the near term.

Analysts expect Kellogg’s adjusted EPS to fall 15.8% in the first quarter of 2019. Meanwhile, it is projected to decrease by more than 10% in the second quarter. For the full year, analysts expect Kellogg’s bottom line to decline by ~3%.

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