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Why Kellogg’s Margins Could Remain Weak

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Q4 2018 margins disappoint

Kellogg (K) continued to disappoint investors with its margins performance in the fourth quarter. Kellogg’s DSD (direct store delivery) exit negatively impacted pricing, and in turn, its profit margins. Meanwhile, weakness in organic volumes further remained a drag. The consolidation of Multipro operations and a mix shift towards emerging markets (low margin business) pressured fourth-quarter margins. Higher input costs and increased packaging and transportation costs subdued margins further.

Kellogg’s adjusted gross margin contracted 280 basis points to 34.6%. Meanwhile, the adjusted operating margin fell 90 basis points to 13.1%.

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Higher commodity and transportation costs continue to hurt the profit margins of packaged food manufacturers. Conagra Brands (CAG) and Hershey (HSY) posted weak gross margins during the last reported quarter, reflecting higher costs. Meanwhile, General Mills (GIS) and Mondelēz (MDLZ) managed to expand margins. However, inflation in input costs and higher transportation costs remained a drag.

Outlook

Kellogg’s profit margins are expected to remain weak in the near term. Lower net selling prices, an adverse mix shift, and the consolidation of Multipro operations are expected to take a toll on its margins performance in the first half of 2019. Meanwhile, inflation in input costs is likely to remain elevated and affect margins. Also, higher packaging and brand marketing investments could further pressure Kellogg’s profit margins.

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