Kellogg Company K posted an earnings beat in the third quarter of 2016 on robust cost savings. However, sales fell short of expectations as improved U.S. cereal trends seen in the fourth quarter could not be sustained.The company raised its earnings guidance for 2016, encouraged by lower effective tax rates in the third quarter. However, it has trimmed its sales outlook owing to currency headwinds.Earnings BeatThird-quarter adjusted earnings of 96 cents per share beat the Zacks Consensus Estimate of 87 cents by 10.3%. Earnings grew 12.9% year over year given the profit margin expansion across all regions and a lower effective tax rate that offset the negative impact of currency translation.Excluding currency headwinds of 4 cents (mostly from the Venezuela business), earnings increased 17.6% year over year.Adjusted earnings exclude costs associated with Project K, a mark-to-market loss and certain other items. Including these items, however, the company’s earnings were 82 cents per share, up 41.4% year over year.Revenues MissKellogg reported revenues of $3.254 billion, down 2.2% year over year. Significant currency headwinds from the re-measurement of the Venezuelan business in mid-2015 resulted in the underperformance. Revenues also missed the Zacks Consensus Estimate of $3.29 billion by 1.1%.Currency hurt sales by 1.5% in the quarter. Acquisitions and dispositions had a positive impact of 0.2%. Accordingly, organic revenues (excluding the impact of acquisitions, dispositions and foreign exchange) declined 1% as against 8.6% growth seen in the previous quarter. The decline can be attributed to trade-inventory reductions in U.S. cereal, softness in U.K. cereal, and portfolio transitions in U.S. Frozen and Kashi businesses. Excluding Venezuela, organic sales growth decreased 2.6%.Volumes declined 1.8%, wider than the 1.6% drop in the preceding quarter. On the other hand, price/mix added 0.8% to sales, lower than the 10.2% contribution in the last quarter.Profits RiseKellogg’s adjusted operating profit grew 3.4% to $482 million, partly hit by currency headwinds of 3.5%. Profits deteriorated in Europe but improved in North America, Latin America and Asia-Pacific.However, excluding currency impact, adjusted operating profit surged approximately 5% on strong Project K cost savings.Segment DiscussionNorth America: Kellogg’s North America sales declined 2.2% (down 2.3% organically) year over year to $2.21 billion. However, the decline in organic revenues was lower than a 3.2% drop in the previous quarter. Volumes declined 1.9%, as compared with a 2.4% decrease in the previous quarter. Price/mix was down 0.4% as against growth of 0.8% in the previous quarter. Adjusted operating profit rose 4.6% organically in North America.Europe: Segment revenues of $594 million declined 5.4% due to currency headwinds. Organically, sales were 6.7% down in the third quarter as against flat growth seen in the last quarter. Organic operating profit declined by $1 million in Europe.Latin America: Segment revenues of $197 million dropped 2.5% due to currency headwinds. Organic operating profit increased 21.7% in Latin America.Asia Pacific: Segment revenues of $248 million improved 5.5% led by strong growth across the region for Pringles. Organically, sales increased 6.1%. Organic operating profit grew 15% in the Asia Pacific.2016 ViewsThe company now expects to grow a little less than 4% on a currency-neutral comparable basis and down 1% (excluding Venezuela). The latter is a reduction from previous guidance of flat.The company now expects adjusted constant currency earnings (including the impact of Venezuela) in the range of $4.16-$4.23 per share, up from the previous $4.11-$4.18 range.However, including currency impact, adjusted EPS guidance is now forecasted between $3.64 and $3.71.Adjusted constant currency operating profit growth projection, including benefits from Venezuela, remained in the range of 15%-17%.Kellogg holds a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.Better-ranked food stocks include ConAgra Foods, Inc. CAG, The Kraft Heinz Co. KHC and Lancaster Colony Corp. LANC, all with a Zacks Rank #2 (Buy).
KELLOGG CO Price, Consensus and EPS Surprise
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