Kellogg Company (K – Free Report) has been benefiting from high demand for packaged food products amid the coronavirus-led stockpiling. Further, the company’s e-commerce business has been performing well amid the pandemic. Certainly, Kellogg’s focus on strengthening its brand through lucrative buyouts and meaningful innovation has been a driver.
However, the company’s foodservice business has been under pressure amid the pandemic-led social distancing. Also, escalated costs have been a concern. Let’s delve deeper.
Kellogg Gains on High Demand, E-commerce Strength
Burgeoning pandemic-induced demand helped Kellogg retain its organic sales trend in fourth-quarter 2020, which moved up 2.5% on the back of growth in all four regions and strength in the cereal and snacks category. Further, management stated that the at-home consumption growth rate remained high worldwide. We note that elevated demand fueled the company’s retail channel in North America. At-home demand is likely to remain relatively high in 2021, though it is expected to lapse major surges in the first two quarters.
The company said that it returned to balanced growth in 2020 between net sales, earnings per share, margins and cash flow and expects to continue seeing this trend in 2021, despite unfavorable comparisons with 2020’s pandemic-related demand increase and an additional week. Although organic sales in 2021 are estimated to drop nearly 1%, it is mainly due to comparisons with an exceptionally solid pandemic-led growth in the year-ago period. This guidance implies a two-year compound annual increase of nearly 2.5%. Adjusted earnings per share in 2021 are expected to grow about 1% at cc. This indicates a two-year compound annual increase of 4-5%.
Further, Kellogg is benefiting from its solidified capabilities in the digital, e-commerce, and data and analytics arena and is on track to expand capacity. Incidentally, online shopping for food witnessed a sea change in 2020 wherein Kellogg’s e-commerce sales soared in triple digits. This was accountable to the company’s brand strength and investments toward enhancing infrastructure and capabilities, which is likely to continue working in the company’s favor. Also, management remains focused on making supply-chain investments, though these are likely to entail high costs.
High Costs & Softness in Away-From-Home Business
In the fourth quarter of 2020, Kellogg continued to incur high costs associated with COVID-19. Apart from this, the company saw a double-digit rise in advertising and consumer promotion investments. Additionally, increased performance-based compensation weighed on the adjusted operating profit to some extent. Persistence of these factors remains a threat to the company’s performance. Adjusted operating profit in 2021 is expected to decline roughly 2% at cc due to tough comparisons with the year-ago period that included robust coronavirus-led growth and an additional week. Nonetheless, this implies a two-year compound annual increase of 3-4%.
Additionally, the company’s foodservice business has been troubled due to declines in food sold in the away-from-home network. This continued in the fourth quarter of 2020, wherein the away-from-home business declined in double digits. Kellogg expects the away-from-home business to remain soft in 2021, though it is likely to moderate over time. Also, growth in emerging markets is expected to be affected by tough macro conditions.
A robust retail business, together with strength of its brands, is likely to help Kellogg stay poised amid the hurdles posed by coronavirus. We note that the company has been dedicated to augmenting its portfolio by adding more products under existing brands, innovation and marketing initiatives. The company has been focused on investing in brand-building efforts, including investments in digital media, consumer promotions and traditional advertising.
Shares of this Zacks Rank #3 (Hold) company have increased 10.9% in the past year compared with the industry’s growth of 46.2%.
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