BATTLE CREEK, MICH. — March sales of ready-to-eat cereal — up 43%.Crackers — up almost 40%.
Waffles — up 45%.
Plant-based meat alternatives — up 66%.
Announcing financial results for the first quarter of 2020, Kellogg Co., Battle Creek, shared some eye-popping growth figures during the final month of the quarter.
Kellogg net income in the three months ended March 28 was $350 million, equal to $1.01 per share on the common stock, up 23% from $282 million, or 82¢ per share, in January-March 2019. Sales were $3.4 billion, down 3%. Results for 2019 included the company’s cookie, fruit snacks, pie crusts and ice cream cone business sold in late July 2019 to The Ferrero Group.
Operating profit of the North America segment was $366 million, down 3.7% from $395 million last year. Sales were $2.1 billion, down 8%. Adjusted for divestitures, sales rose 6% with volume up 5%.
In trading April 30, Kellogg shares rose 60¢, or 0.9%, closing at $65.60 a share.
Details about the North American business were discussed at length during an April 30 conference call with analysts.
Looking at the business by segment, sales of the company’s Snacks segment, its largest, were strong going into March when it received an extra boost from expanded consumption growth, said Amit Banati, senior vice president and chief financial officer.
The company’s cracker sales jumped almost 40% versus a year earlier, and salty snacks and wholesome snacks enjoyed jumps of nearly 30%.
“This consumption growth has been broad-based across our portfolio of brands,” Mr. Banati said. “From an occasion standpoint, we have seen less lift for on-the-go items and more growth for pantry packs, which makes sense. We feel good about the positioning and strength of our North America snacks business as we work daily to keep up with demand.”
Performance was no less impressive in ready-to-eat cereal with sales up 43% in March from March 2019. Difficult to parse out in the strong gains were fruits of Kellogg brand-building efforts, Mr. Banati said. Still, he said share gains in the Kellogg taste/fun segment were encouraging. Additionally, he said Kellogg saw positive signs indicating greater household penetration of its brands.
“Importantly, cereal is one of the food categories whose consumption has remained at very elevated levels, even after the couple of weeks of consumer stockups,” he said. “An interesting thing to watch will be how this stockup and elevated consumption is driving trial and reappraisal of this category. US household penetration data showed that our cereal brands collectively gained more than three points of penetration in March versus February and did this against all cohorts, whether by age group, income level or households with or without kids. As I mentioned, this is something we’re studying closely and looking to build upon. We know that our cereals are getting into the pantry and that they’re getting consumed. They’re iconic brands, great food, versatile across occasions and a great value for money. Consumers rediscovering these benefits could be very positive for this category, and we plan to seize this opportunity.”
Kellogg’s strong results extended to its North American frozen foods business, with Eggo sales surging and claiming share gains. Consumption growth accelerated to more than 45% in March, Mr. Banati said. Similarly, Morningstar Farm sales already were growing at a strong double-digit rate before the pandemic, he said. In more recent weeks, consumption has jumped more than 66%.
Kellogg had planned to launch Incogmeato, a Morningstar Farms line of refrigerated meat alternatives, but is delaying the introduction until later in the year, when plant-based sausage products also will be launched.
“Not everything is seeing a lift during the pandemic,” Mr. Banati said. “Our business in foodservice, vending and convenience stores experienced sharp and sudden net sales declines in March as schools and restaurants closed and travel came to a halt. And that softness continues.”
For the year, Kellogg left its guidance unchanged, projecting organic sales growth of 1% to 2% and operating profit down 4% on a currency-neutral basis, reflecting the absence of the divested business.
Pressed about the company’s decision to leave guidance unchanged after such an explosive first quarter, Steven A. Cahillane, chairman, chief executive officer and president, responded that guessing how long changed consumer behaviors will persist is impossible to know.
“We think prudence in this very uncertain environment is the right way to go,” he said.
He offered four elements shaping the company’s thinking.
“One is what I just said, the environment is incredibly uncertain,” he said. “In fact, most companies are actually withdrawing guidance because of this uncertainty, and we’re affirming guidance. The second is lost activities in second and third quarter. So you have things like the European championship in Europe, which is a big event for Pringles. That’s not going to happen. You have the lag impact of investments that we’re going to make in the second half that are not in the first half. So there is a big shift from the first half to the second half in investments, and there’s some volume that’s going to come out in the second half. The third is emerging markets slowdown. We’re already seeing it in large markets like Nigeria where we have a big business. You think about oil-based economies, and nobody ever imagined oil would be where it is right now. Well, that’s going to impact these economies. And so we think we can manage through it. We’ve got the right playbook. We’ve been here before. But it’s going to have an impact. Emerging markets are going to slow down. And then finally, we will have the flexibility to reinvest in the business to make this company stronger and stronger and come out of this pandemic with very good share positions, very high brand equity scores and just a better company.”
Amid the considerable good news, Mr. Cahillane conceded Kellogg has lost market share in the RTE cereal category.
He said taste/fun cereal has grown faster than adult cereal. Because Kellogg over-indexes in adult cereals, it has lost share overall. With frosted flakes and Froot Loops, the company is making inroads.
“We’re not in the business of donating share, but right now, we’re doing everything we can to satisfy the orders that are coming in,” he said.
Going into a recession, Kellogg will not be shifting into a defensive mode, Mr. Cahillane said.
“Some of the mistakes made across categories in recessions is a hunkering down mentality, which takes away brand building and shows up on innovation,” he said. “People still want good news. People want fun. They want to try things in an affordable way. And our brands are iconic. They bring joy. And so we’ll be bound and determined to continue to invest, to innovate, but to be very mindful of the price value relationship and making sure that people understand how economic, for example, ready-to-eat cereal is in terms of a meal solution. It’s an incredibly economic way to feed your family.”