Kellogg bullish after good Q1

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After repeated warnings that the spiralling cost of raw materials
would impact profits this year, US-based breakfast cereal producer
Kellogg yesterday said that it had got off to a
better-than-expected start to the year and forecast first quarter
growth of around 30 per cent.

Kellogg attributed the good Q1 performance to strong double-digit sales growth during the period, far stronger than had been expected, as well as to currency movements, which had a more beneficial impact on profits than initially forecast.

But a capacity rationalisation project, planned during the quarter, did not take place, which means that the costs related to the programme will impact second quarter figures instead.

Carlos M. Gutierrez, chairman and chief executive officer of Kellogg, said that the good performance had also prompted the company to raise its earnings forecast for the year - the cereal maker is now predicting growth of around 8-10 per cent, slightly above its long-term target of high single digit gains.

Furthermore, this improved growth target includes the impact of higher estimated costs relating to capacity rationalisations and cost-reduction initiatives.

"Our business momentum is strong enough that we can raise our earnings guidance, even as we encounter significantly higher commodities costs and reinvest for the future. This reinvestment includes substantially increased brand building, as well as costs related to projects that offer high returns on investment and the opportunity to enhance profitability in the future,"​ Gutierrez said.

Kellogg's bullish outlook marks something of a turnaround after several months of warnings about high commodity costs - for sugar, cocoa, cereals, edible oils, etc. - and in fact just last week Gutierrez was quoted as saying that the situation could not continue for much longer.

With Kellogg now predicting profit growth for the year, the likely outcome will be higher retail prices, with the company expected to pass on the higher commodity costs to its customers, the retailers.

Kellogg has not confirmed that it plans price increases - its suggestion is that operating efficiencies and additional volume through new product launches will be sufficient to offset the cost of commodity price hikes - but it undoubtedly remains a possibility.

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