Kellogg sees 'signs of progress'

by Eric Schroeder
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Kellogg's core 5 cereals: Frosted Flakes, Mini-Wheats, Raisin Bran, Special K, Rice Krispies
Kellogg's Special K, Raisin Bran, Rice Krispies, Frosted Flakes and Mini-Wheats cereals all gained or maintained share in the quarter.

BATTLE CREEK, MICH. — Even though company-wide earnings and sales were down from a year ago, The Kellogg Co.’s first quarter of fiscal 2016 featured some “very tangible signs of progress,” John Bryant, chairman and chief executive officer, told analysts during a May 5 conference call. Those signs included evidence of sustainable improvement in results, especially in the company’s U.S. operations.

Operating profit in the company’s U.S. Morning Foods unit during the first quarter ended April 2 increased 17% to $148 million from $127 million. Sales in the unit decreased 1.2%, falling to $767 million from $776 million a year ago.

Paul Norman, Kellogg
Paul Norman, president of Kellogg North America

“Overall, we are pleased with the results in the first quarter, and we remain on track with our plan to return to growth in 2016,” said Paul Norman, president of Kellogg North America. “Our core six cereal brands in combination drove another quarter of share growth. Special K, Raisin Bran, Rice Krispies, Frosted Flakes and Mini-Wheats all gained or maintained share in the quarter. And Special K led the way with good performance resulting from our redesigned messaging, product renovation and innovation. And as you know, we recently launched new Special K Nourish in the U.S. It’s early, but we are encouraged by the initial acceptance.”

Mr. Norman said Kellogg has confidence the U.S. cereal business will continue to improve in the coming quarters. Planned activities include the launch of two Raisin Bran granolas and a Pixar’s Finding Dory-themed cereal and promotion scheduled to coincide with the release of the movie in June.

Turning to U.S. Snacks, operating profit in the first quarter totaled $83 million, up from $80 million a year ago. Net sales were $832 million, down 3% from $854 million a year ago.

Finding Dory cereal and Raisin Bran granola, Kellogg
Kellogg plans to launch two Raisin Bran granolas and a Pixar’s Finding Dory-themed cereal.

Mr. Norman said the decline in sales was “a little more than we planned” because of two factors: a reorganization of the sales force and struggles in the wholesome snacks business.

Kellogg believes the reorganization of the sales force has created more clearly-defined roles for the selling, merchandising and support of its products, and as a result should drive more effective selling and merchandising, Mr. Norman said.

Wholesome snacks, on the other hand, remain a challenge.

“We are still up against lost distribution particularly from some prior year’s innovations that simply haven’t stuck,” Mr. Norman said. “As you know, it’s absolutely critical to get the food and the brand positioning right in this category.

Special K Protein Trail Mix Bars, Kellogg
In the wholesome snacks segment, Kellogg plans to launch Special K protein trail mix bars.

“The good news is that Rice Krispies Treats have been a strong performer, and its share was up again in Q1. And we have several on-trend innovations and renovations launching here in the back half for all of our big wholesome snacks brands, such as Special K protein trail mix bars, a new Nutri-Grain pumpkin spice variety and a couple of Cocoa Krispies Treats, one including M&Ms. These give us reason to believe we can stabilize this business as the year progresses.”

Overall, though, Mr. Norman said it is important not to lose sight of what has worked well in the company’s snacks business, specifically its big three brands of crackers: Cheez-It, Town House and Club. Together, the three brands posted good growth in sales, consumption and share, he said.

“This is where we’ve invested — both in brand building and innovation — and it continues to pay off,” he explained. “We feel very good about our plans for the rest of the year in crackers, including innovations like Cheez-It sandwich crackers and Club Snack Stacks launching mid-year.

Cheez-It Sandwich crackers, Club Snack Stackers, Kellogg
Cheez-It sandwich crackers and Club Snack Stacks are set to launch this year.

“We also feel very good about our Pringles business. In Q1 it posted growth in net sales and consumption. In fact, we saw double-digit consumption gains for our core range, aided by efforts to improve assortment on shelf and increase brand-building support. We also had double-digit consumption growth in our on-the-go formats business. We have more brand investment and exciting professional events coming, giving us confidence in an accelerating growth trend for this brand year to go.”

The sales force reorganization had a significant impact on Kellogg’s cookies business, Mr. Norman said, as did an investment plan that didn’t kick in until the second quarter.

“We are reinvesting in our core foods in the form of renovated products and packaging, new products and seasonal rotations,” he said. “And importantly, we are returning to advertising behind Keebler after several years off air.”

Keebler birthday cake Fudge Stripes cookies, Kellogg
Kellogg plans to return to advertising behind Keebler, which recently introduced a birthday cake Fudge Stripes cookie variety.

Kellogg’s U.S. Specialty unit posted operating profit of $86 million in the first quarter, up 10% from $78 million in the same period a year ago. Sales also increased, rising to $376 million from $361 million.

Mr. Norman said double-digit growth in the convenience channel led the way, boosted by strong consumption and share growth in cereal, crackers, Rice Krispies Treats, Pop-Tarts and salty snacks. The company also saw distribution gains in vending in various categories and had a strong Girl Scout cookie season.

Overall, net income at Kellogg Co. in the first quarter totaled $175 million, equal to 50c per share on the common stock, down 23% from $227 million, or 64c per share, in the same period a year ago. Sales were $3,395 million, which compared with $3,556 million a year ago. 
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