Snacks 'an area of weakness' for Kellogg

2/12/2016 - by Monica Watrous

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Kellogg has had a headwind from Special K snacks over the last few years.

BATTLE CREEK, MICH. — A priority for Kellogg Co. in the year ahead is to stabilize its snacks business, admittedly “an area of weakness” for the Battle Creek-based company, said John Bryant, chairman and chief executive officer.

John Bryant, chairman and c.e.o. of Kellogg

“We’ve had a disappointing couple of years in U.S. Snacks,” Mr. Bryant said during a Feb. 10 earnings call with financial analysts. “We have had a headwind from Special K in snacks over the last couple of years. You’ve seen that come through in our cracker business, with Special K Cracker Chips; it has come too in our wholesome snacks business with Special K bars.

“The good news is where we have renovated those foods, similar to what we’ve done in cereal, we’re seeing the business stabilize.”

With a new leadership team in place, Kellogg is confident in returning the snacks business to modest top-line growth in 2016. The company noted sequential improvement in consumption in its crackers, cookies and wholesome snacks businesses in the recent quarter.

“We have had strong growth in Cheez-It over the last several years,” Mr. Bryant said. “We’re seeing good growth in Pringles; we’re seeing good growth in Rice Krispy Treats and wholesome snacks. Our cookie business is stable over the last couple quarters, so actually we’ve seen better trends within the business.

Kellogg has seen growth in Cheez-It, Rice Krispy Treats and Pringles.

“So as we go forward into 2016, we expect to return this business to top-line growth, although modest. And we absolutely expect to return the business to bottom-line growth.”

Kellogg’s snacks strategy includes product innovation, expanded distribution and stronger in-store execution. The company is set to debut new Nutri-Grain bars and a Special K Chewy Nut Bar in the year ahead.

“Our wholesome snacks piece is more about ensuring all of our foods are on trend,” Mr. Bryant said. “There is work that has been done there, we have done that work, we have seen better results and there’s still more to do.”

Meanwhile, Kellogg’s cereal business posted solid growth in the quarter, led by significant improvement in Special K consumption.

Kellogg's cereal growth was driven by its renovation of Special K Red Berries and the introduction of Raising Bran with cranberries.

“This was driven primarily by changes to messaging and the renovation work we did last year on Red Berries,” Mr. Bryant said. “And the good growth we saw all year on Raisin Bran was the result of the introduction of Raisin Bran with cranberries, which should have good results for the entire franchise.”

The company credits strategic investments in brand building and product development for the boost in breakfast products.

“We’re going to continue to drive sales in 2016 with the introduction of new products like Special K Nourish… a cereal with positive nutrition and ingredients the consumer can see, and the food includes fruits, nuts and on-trend grains like quinoa,” Mr. Bryant said. “We have a range of new products launching in 2016; some are on-trend foods such as Special K Nourish and Harvest Delights Mini-Wheats. Some are fun additions, including Smorz, Disney Dory-themed cereal and Orange Crush Pop-Tarts.”

Kellogg is introducing some "fun" cereals, including Finding Dory cereal and Smorz.

For the fiscal year ended Jan. 2, Kellogg net income was $614 million, equal to $1.74 per share on the common stock, down 3% from $632 million, or $1.76, in the prior year. Net sales were $13,525 million, down 7% from $14,580 million the year before. Full-year currency-neutral comparable earnings $3.81 per share, which was in line with the prior year, and currency-neutral net sales increased by 1.2%.

For the fourth quarter, Kellogg recorded a loss of $41 million, which compared with a loss of $293 million in the fourth quarter of 2014. Adjusted comparable earnings were 79c per share, down 6% from comparable e.p.s. in the fourth quarter of 2014, the company said.

Net sales for the quarter were $3,142 million, down nearly 11% from year-ago sales of $3,514 million. Fourth-quarter currency-neutral comparable net sales increased by 4.2%.

Within Kellogg North America, operating profit for the company’s U.S. Morning Foods business decreased 1% for the year and increased 5% for the quarter, while U.S. Snacks profit was down 5.8% for the year and nearly 13% for the quarter, and U.S. Specialty Channels profit declined 2.3% for the year and gained 5.3% for the quarter. Operating profit for North America Other, which includes Kashi, U.S. frozen and Canada, was down 40% for the year and 45% for the quarter.

Within Kellogg North America, operating profit for the company’s U.S. Morning Foods business decreased 1% for the year and increased 5% for the quarter.

The U.S. Morning Foods segment’s comparable sales declined 1.6% in the full year and increased 1.5% in the fourth quarter, reflecting improving trends in the cereal business. Comparable sales for the U.S. Snacks segment declined 1.6% for the full year and 1.9% for the quarter; however, consumption improved sequentially in each of the categories in the segment, the company said. The U.S. Specialty Channels business reported 0.7% increase in sales for the year and a 1.5% increase for the fourth quarter. Currency-neutral comparable net sales for the North America Other segment were down 3.2% for the year and 2% for the quarter, driven by a decline in trade inventory as a result of new packaging for MorningStar Farms, as well as continued weakness in the Kashi business.

Kellogg North America comparable net sales on a currency-neutral basis were down 1.6% for the year and 0.4% for the quarter.

Within Kellogg’s International business, the Latin American segment achieved currency-neutral sales growth of 25% for the year and 45% for the fourth quarter, Europe reported a 0.6% decline in currency-neutral sales for the year but a 1.6% increase for the quarter, and Asia Pacific saw currency-neutral sales advance 4% for the year and 3.3% for the quarter.

Kellogg reaffirmed its previous guidance for adjusted 2016 earnings per share growth of 6% to 8%, net sales growth of 1% to 3%, and operating profit growth of 4% to 6%, all on a currency-neutral basis. The company expects to generate a total of $200 million in savings in 2016 through its Project K and zero-based budgeting programs.

“The momentum we built in 2015 was the result of better innovation, better support, better execution and some of the visibility provided by our cost savings programs,” Mr. Bryant said. “We expect that this level of execution and the momentum to continue in 2016.”