By Jinman Li
Kellogg Co.’s (NYSE: K) fourth-quarter earnings topped Wall Street’s estimate, thanks to the acquisitions of protein bar maker RXBAR and Brazilian food seller Parati, as well as to favorable currency translation.
The Battle Creek, Mich.-based cereal company swung to a profit of $428 million, or $1.23 per diluted share, in the quarter ended Dec. 30, compared with a year-earlier loss of $52 million, or 15 cents per diluted share. Analysts polled by Bloomberg estimated a profit of 75.5 cents per share. Sales rose to $3.21 billion, up 3.6 percent from $3.10 billion for the same period in the year prior.
The surge in earnings came as a result of favorable mark-to-market adjustments, lower restructuring charges, and higher operating profit. The company’s quarterly reported operating profit jumped nearly seven-fold to $669 million from $98 million in the prior-year quarter. Strong productivity savings related to the Project K restructuring program, represented by the exit from U.S. Snacks segment’s Direct Store Delivery (DSD) system, contributed significantly to the growth, which offset the company’s increased investment in advertising and promotion.
The decision to abandon direct-store distribution in favor of warehouse delivery is “crucial,” wrote Erin Lash, director of consumer equity research at Morningstar Research Services LLC in a note to investors. “We perceive this shift as enabling the firm to free up funds that previously had been invested behind its distribution network to be reallocated toward brand building, which we view as crucial given the ultracompetitive landscape in which it plays.”
Apart from the restructuring savings, Kellogg’s expansion in market scale via the integration of Parati, which tripled the company’s size in Brazil and the completion of the acquisition of RXBAR, which expanded the company’s presence in health and wellness, also bolstered the growth, said Steve Cahillane, Kellogg’s chief executive officer, on the conference call.
Despite the substantial increase in brand-building investment in 2017, Kellogg will continue to boost such investment, stated Cahillane.
Lash projected that “Kellogg will invest more than 8 percent of sales -around $1.1 billion annually- to support its brand intangible assets.”
For the full fiscal year, the company earned $1.27 billion, or $3.62 per diluted share, compared with $695 million, or $1.96 in the prior year. Net sales slipped 0.7 percent to $12.92 billion from $13.01 billion in 2016.
Looking ahead, Kellogg projected flat net sales on a currency-neutral basis, and adjusted earnings per share growth of 9 percent to 11 percent on a currency-neutral basis, which includes the expectation of a modest decrease in average shares outstanding.
Kellogg shares closed at $65.89, up $1.77 or 2.76 percent in NYSE trading.