What Made Kellogg Update Its Fiscal 2016 Guidance?
Kellogg Posts Fiscal 1Q16 Earnings and Updates Guidance
Kellogg updates fiscal 2016 guidance
After a better-than-expected performance by its Venezuelan business, Kellogg (K) updated its guidance for currency-neutral comparable net sales, operating profit, and earnings per share. It expects that it will beat its long-term target of currency-neutral adjusted net sales and operating profit growth in fiscal 2016. Net sales growth is projected to be in the range of 4%–6%, and operating profit growth is expected to be in the range of 11%–13%. The company expects that its fiscal 2016 adjusted net sales growth might exceed the guidance range due to changes in its business in Venezuela.
Savings from Project K
Kellogg expects to see a better gross margin through savings from Project K and zero-based budgeting. Deflation is also supposed to affect the company’s gross margin. The company expects interest expenses to be in the range of $235 million–$245 million. The adjusted effective tax rate is projected to be in the range of 27%–28%.
Incremental savings from Project K are still expected to be ~$100 million in fiscal 2016. Savings through zero-based budgeting are still projected to be roughly $100 million.
In its fiscal 1Q16 earnings release, Kellogg also reaffirmed that it expects its fiscal 2016 cash flow to be ~$1.1 billion. Capital expenditure for the year is anticipated to be between 4% and 5% of sales. This would include the effect of the cash required by Project K and an increase in capital spending equal to ~1% of sales to support the growth of the Pringles business.
Omissions from guidance
The guidance for net sales and operating profit excludes the following items:
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the effect of mark-to-market adjustments
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integration costs
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costs related to Project K
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acquisitions and dispositions
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foreign currency translation
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remeasurement of the Venezuelan business
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other items that could affect comparability
Kellogg’s peers in the industry include The Hershey Company (HSY), Cal-Maine Foods (CALM), and Mead Johnson Nutrition Company (MJN). Hershey and Mead Johnson Nutrition Company have seen year-to-date (YTD) returns of 4.3% and 8.9%, respectively, while Kellogg and Cal-Maine Foods have seen YTD returns of 5.6% and 4.4%, respectively, as of May 10. The PowerShares S&P 500 Quality Portfolio (SPHQ) invests 0.84% of its holdings in Kellogg.
In the next part of this series, we’ll look at what analysts recommend for Kellog after fiscal 1Q16 earnings.
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