Kellogg's Q3 2017 profit rises despite sluggish cereal and snack sales

By Gill Hyslop

- Last updated on GMT

The Kellogg Company has posted better-than-expected results, despite weak performance from its US cereals and snacks divisions. Pic: ©GettyImages/Jirsak
The Kellogg Company has posted better-than-expected results, despite weak performance from its US cereals and snacks divisions. Pic: ©GettyImages/Jirsak

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The Kellogg Company’s sales have seen a transformation, reflecting its first quarterly increase in more than two years.

The cereal giant reported its net sales rose 0.6% to $3.27bn in Q3 2017, despite a drop in revenue in both its cereals and snacks businesses.

Analysts had predicted sales would fall by 1.4% to $3.21bn.

The Special K, Corn Flakes and Rice Krispies maker has been witnessing a top-line weakness for the past several years, caused by a shift in consumer preference toward natural and organic ingredients over packaged and processed food.

Revenue from Kellogg’s US Morning Foods unit fell 3% to $7.1m from $7.3m, while its US Snacks sales were down by 4.5% to $7.6m from $7.9m compared to the year prior.

Sharp decline into resumed growth

However, sales in the second half of 2017 somewhat benefitted from innovation and Pringles’ improved performance in Europe and other parts of the world, reflecting a 1.7% rise in net income to $297m in the quarter ended September 30, from $292m a year earlier.

“Over the course of Q3, we did return to promotional activity, and this turned our European Pringles sales from sharp decline into resumed growth. Just as important, Pringles recorded net sales growth in Q3 across all of our regions globally,”​ said Kellogg’s chairman John Bryant, who has retired as the company’s CEO and handed the reigns to Steve Cahillane.

Kellogg also attributed the better-than-expected performance to stronger demand for its frozen foods, such as Eggo waffles and Morningstar Farms burger patties, and the strength of the euro.

The euro rose 3.3% against the dollar during the quarter, boosting the value of its European sales when translated into dollars.

Aggressive cost cutting

Additionally, Project K, the company’s cost-cutting plan to reduce annual overhead by $600m to $700m in 2019, and Zero Based Budgeting, are gaining momentum.

Kellogg is also making aggressive efforts to improve its food offerings to reduce sugar and artificial ingredients. A Special K cereal made with probiotics will be launched later this year, and a Raisin Bran cereal made with banana will come out next year.

The company acquired protein-bar maker RXBar last month​ in its move towards healthier products. Sales of RXBar, said Bryant, were growing rapidly.

“Its sales will nearly quadruple in 2017. And somewhat rare in this space, it is already very profitable,”​ he said.

Hungry for change

Cahillane said Kellogg’s is open to more acquisitions.

The entire organization is hungry to get back to growth, and it’s open to new ideas,” ​he said.

Summary of results

  • Net income of $297m, or 85c per share versus $292m, or 82c per share, a year earlier.
  • Revenue of $3.27bn, exceeding analyst forecasts of $3.21bn.
  • Full-year earnings forecast to be $4 to $4.06 per share.
  • Operating profit jumped 13% as margins climbed 160 basis points. 

“For instance, our 1894 venture capital fund invests in early stage technology and food businesses. We've been experimenting with direct-to-consumer for our Bear Naked brand, and we’re learning from the pop-up cafes we've opened up around the world.

“This is not a company that’s sitting on its hands,” ​he said.

Kellogg raised its full-year adjusted profit forecast to $4.00-$4.06 per share, up from its previous forecast of $3.97-$4.03, citing a smaller impact from currency translation than previously anticipated.

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