Dive Brief:
- Kellogg's operating profit jumped while its sales slipped, according to its most recent earnings report. Currency neutral operating profits were up 6.9% to $544 million, when compared with a year ago, but reported net sales had tumbled 2.5% to $3.19 billion.
- Net sales were down in the United States due to less robust consumption in the traditional sector. There were lower sales on morning foods, and sales in the snacks segment remained flat.
- In the report, Chairman and CEO John Bryant said these results keep the company on track to meet its full-year financial goals and continued improvement in sales and profit margins. "We continued to make progress toward the transformation of our company," he said in the statement. "For instance, during the quarter we made strong progress on our transition out of Direct Store Delivery (DSD) in U.S. Snacks, an enormously complex initiative that the team has executed exceptionally well. We remain committed to returning to top-line growth, as outlined in our 2020 Growth Plan."
Dive Insight:
While Kellogg is delivering positive results to investors, they're more hollow and not sustainable during the long term. The operating profit bump, the report acknowledges, comes from the company's use of zero-based budgeting, layoffs through "Project K," changes in its distribution model for snacks and new administrative efficiencies. While it's good the manufacturer is able to weather slower sales by streamlining its internal operations, the point may be on the horizon where there's nothing left to cut.
The cereal sector, which is most often associated with Kellogg, improved sequentially, according to the report, but sales remained soggy. The manufacturer has invested in reinvigorating its cereal portfolio, and it remains to be seen if it will be as successful as it needs to be. One bright spot: Kellogg reported gaining market share in toaster pastries following the release of Jolly Rancher Pop-Tarts. The Kashi brand also is gaining share in cereal, while slowing down the impact of declines in snack bar sales.
Snacks, dominated by brands like Cheez-It, Pringles and Keebler, remained flat this quarter. Savings anticipated from the transition away from the direct-store delivery model were offset by lower sales and less store activity, but the company's big 3 cracker brands and Rice Krispies Treats continued to hold their own.
In its outlook for the rest of the year, Kellogg predicted more of the same: A continued decline in net sales of 3%, and growth of 8% to 10% for earnings per share.
While it's good for the company to be realistic, it's difficult to see how so many internal cost cuts will help build the company back toward top-line growth. The larger problems seem to be on the sales side. Even though it's easier for Kellogg to predict the financial impact of internal changes, it may be about time for the company to invest more in things that may be able to help sales, like e-commerce and product development.