Kellogg showing 'excellent visibility' into cost savings

by Eric Schroeder
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Declining Special K products - nutrition bars, cracker chips, pastry bars, Kellogg
 Kellogg's Special K brand continues to face challenges in nutrition bars, pastry bars and cracker chips.

NEW YORK — A recent meeting with executives at the Kellogg Co. has left analysts with Credit Suisse feeling mostly positive about the state of the Battle Creek, Mich.-based company.

Robert Moskow, a research analyst with Credit Suisse, wrote in an Aug. 29 research report that the group’s view of the company was “reinforced,” specifically that Kellogg has “excellent visibility into cost savings to achieve the new operating margin target (17% to 18% by 2018) it established on its 2Q earnings call.” He added that the company appears to be making the changes to its internal processes and corporate culture to achieve the target.

On the other hand, Mr. Moskow said he heard evidence that top-line trends will remain subdued for at least the rest of the year as Kellogg struggles with the negative impact to its mix from declines in the premium-priced Special K brand and continued struggles in wholesome snacks.

Declining Kashi products - pizza, nutrition bars, crackers, Kellogg
Kashi has experienced substantial declines in snack bars, crackers and pizza.

The combined factors led Credit Suisse to maintain a below consensus forecast for sales growth in 2016 and modestly above earnings per share.

Digging deeper into what Credit Suisse described as “leaks in the boat,” Mr. Moskow said that even as the Special K cereal business has stabilized in the United States, the company continues to face challenges in nutrition bars, pastry bars and cracker chips, all of which carry a higher price per lb.

“The Special K brand is down 13% over the past 12 weeks according to our Nielsen data compared to 9% down over the past 52,” he said. “Similarly, while management sounds confident that its Kashi brand has regained its statute with organic/natural foods consumers in the natural foods channel (including a re-listing at Whole Foods), the brand has yet to recover in measured channels. Our data indicates sales down 16% over the past 12 and 52 weeks, with big declines in snack bars, crackers and pizza.”

Special K Red Berries cereal, Kellogg
To help create value, Kellogg is investing in enhanced product quality, such as adding more berries to its Special K Red Berries cereal.

To help create value, Mr. Moskow said Kellogg’s management has committed to a strategy that has worked well for the company in the past: volume-to-value.

“This includes making bigger investments in product quality (like more berries in Special K Red Berries) to justify selling more at full price, putting more discipline into price-pack architecture decisions, and improving returns on trade spending,” he said. “It also entails making fewer ‘big bets’ on new product introductions that extend its brands into unsustainable categories (like Kashi pizza and Special K protein drinks). One of the reasons we think Kellogg is particularly well-positioned to execute this strategy is that the cereal category’s wide breadth of brands and consumer need-states gives the manufacturers a unique degree of flexibility to drive price realization higher when they put their minds to it.”
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