Kellogg Beat Q2 Estimates Due to Higher Pricing

  • Kellogg posted better-than-expected second-quarter earnings.
  • Organic sales continued to improve due to pricing and sustained momentum in Pringles.

On Tuesday, Kellogg (K) announced stronger-than-expected second-quarter results. The company’s net sales and EPS beat analysts’ expectations due to improved underlying sales. However, currency and cost headwinds remained a drag. Also, a higher effective tax rate impacted Kellogg’s bottom line in the second quarter.

Kellogg’s top line benefited from Multipro’s consolidated operations. Improved underlying sales also supported the company’s top line. However, weak volumes and currency fluctuations remained a drag. The margins took a hit due to elevated costs and the negative mix. Lower margins and higher interest expenses took a toll on Kellogg’s bottom line. However, the EPS beat the consensus estimate.

Kellogg Beat Q2 Estimates Due to Higher Pricing

Key second-quarter financials

Kellogg’s top line increased 3% to $3.46 billion. Analysts expected the company to post net revenues of $3.41 billion. Consolidating Multipro added 2.6% to the top-line growth. Organic sales increased 2.3% due to higher net selling prices (+3.3%) and continued growth in Pringles. The organic volumes fell 1%. Meanwhile, currency volatility had a negative impact of 1.9%.

Besides Kellogg, Hershey (HSY) and Mondelēz (MDLZ) also posted improved organic sales. Mondelēz’s organic sales rose 4.6%, which reflected a 3.0% increase in pricing and a 1.6% rise in volumes. Hershey’s second-quarter organic sales benefited from an increase in net selling prices and improved volumes.

The company’s gross margin fell by 240 basis points to 33.4%, which reflected cost headwinds. Multipro’s consolidation had a negative impact on the gross margin rate by 40 basis points. Higher input costs and the negative mix impacted the gross margin rate by 70 basis points and 130 basis points, respectively.

The adjusted EPS was $0.99—down 13.3% on a YoY basis. Lower margins and increased interest expenses, led by Multipro’s consolidation, remained a drag. Also, a higher effective tax rate pressured the company’s second-quarter earnings. However, Kellogg beat analysts’ consensus estimate of $0.92.

Kellogg reaffirmed its guidance

Kellogg reaffirmed its 2019 sales and EPS guidance. Management expects the company’s sales to increase 1%–2% in 2019. A strong performance in the first half will likely boost Kellogg’s fiscal sales growth. Strength in the snacks portfolio and momentum in Pringles will likely drive the growth.

The adjusted EPS will likely fall 10%–11% on a constant currency basis, which reflects weakness in the first half. The negative mix and cost headwinds will likely remain a drag.