Why Kellogg Beat Earnings Estimates for Q3


Oct. 29 2019, Published 2:17 p.m. ET

  • Kellogg posted better-than-expected third-quarter earnings today.
  • Organic sales improved, thanks to the company’s favorable pricing and mix. However, sales and earnings fell on a year-over-year basis.
  • Kellogg management reaffirmed the company’s 2019 outlook.
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Key takeaways from Kellogg’s Q3 earnings

Kellogg (K) posted stronger-than-expected third-quarter earnings today. The company’s revenues came in ahead of analysts’ expectations, thanks to Kellogg’s favorable pricing and mix. However, reported revenues declined on a year-over-year basis as planned divestitures and adverse currency volatility remained a drag.

You should note that Kellogg’s key brands—including Pringles, Rice Krispies Treats, Cheez-Its, and Pop-Tarts—continued to grow. Meanwhile, frozen foods sustained momentum.

Kellogg’s margins benefitted from improved organic sales in Q3. However, input cost pressure and investments in alternative pack formats dragged margins down.

Kellogg’s adjusted earnings per share declined on a year-over-year basis, reflecting margin contraction. However, today’s Kellogg earnings beat Wall Street’s expectations by a wide margin, thanks to a lower adjusted effective tax rate and share repurchases.

Management reiterated the company’s full-year sales outlook. Kellogg expects net sales to increase 1%–2% in 2019. Meanwhile, adjusted EPS are projected to decline 10% on a currency-neutral basis. Earlier, management had forecast a 10%–11% decline in adjusted EPS on a constant-currency basis.

Kellogg stock was trading about 4% higher following the better-than-expected third-quarter earnings performance.

Key financial metrics

Kellogg posted net sales of $3.37 billion, which came in ahead of analysts’ expectations of 3.35 billion and reflected improved organic sales. However, reported revenues declined 2.8%, reflecting the adverse impact from divestitures and currency fluctuations. Organic sales increased 2.4%, reflecting a 3.1% contribution from its higher pricing and mix. However, weak cereals volumes in North America remained a drag.

Kellogg’s currency-neutral adjusted gross margin contracted by 110 basis points. Meanwhile, its adjusted operating margin fell by about 20 basis points. Input cost inflation and higher investments pressured Kellogg’s third-quarter margins.

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Today’s Kellogg earnings announcement also included adjusted EPS of $1.03, beating analysts’ estimates of $0.91 by a wide margin. A lower adjusted effective tax rate (17.9% versus 19.0%) and share repurchases supported Kellogg’s bottom line in the third quarter. However, adjusted earnings per share fell 2.8% on a year-over-year basis, reflecting weak margins.

Kellogg earnings versus Kraft Heinz

In comparison, we expect Kraft Heinz’s (KHC) sales and earnings to both decline on a year-over-year basis in the third quarter. Weak organic sales, higher competition from private label products, and higher promotions could continue to hurt Kraft Heinz’s sales and margins.

Moreover, Kraft Heinz’s EPS decline rate is expected to accelerate sequentially, which could continue to hurt the stock. Kraft Heinz will announce its third-quarter earnings results on October 31, so investors won’t have to wait long to compare to today’s Kellogg earnings.


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