Kellogg Company (NYSE:K) recently reported fourth-quarter earnings, and let’s just say the numbers aren’t as sweet as Kellogg’s cereals products.
Q4 revenues of $3.5 billion fell short of expectations, as did earnings of 84 cents per share. Kellogg also scaled back on its forecasts; previously, Kellogg hoped to increase “long-term sales” by 3% to 4%, but that guidance has been reduced to 1% to 2%.
What’s troubling for Kellogg is that a weak report isn’t the only problem for K stock.
Breakfast Cereal: A Dying Breed
Everyone agrees breakfast still is the most important meal of the day, but it’s clearly not prime time for Kellogg classics like Frosted Flakes and Froot Loops. Consumers have shifted to other options, like yogurt, granola bars and even fast food.
Kellogg has tried to keep up with the Joneses, constantly adding to the Special K line (Kellogg recently released a gluten-free version of Special K) along with healthier Kashi cereals.
Consumers responded positively … at first. Kashi and Special K emerged as revenue leaders for Kellogg. But now, these cereals aren’t holding up — in Kellogg’s most recent quarter, revenues for U.S. breakfast foods were down nearly 8%.
What’s worse is the overall market’s temperature on ready-made cereals. According to a study by the consumer research firm NPD Group, cereal consumption has been trending downward since the mid-’90s. Even since 2000, ready-to-eat cereal sales are down a whopping 40%, and there’s more pain to come — NPD projects a small year-over-year decline in 2014 sales.
More Weakness for K Stock
Kellogg has tried to tighten spending, introducing the “Project K” initiative to cut costs, but Kellogg CEO John Bryant admits they can’t “save its way to prosperity.” In short — if sales don’t increase, Tony the Tiger’s going to be in deep trouble.
Analysts don’t see much they like about K stock, either. Of 18 analysts polled by Thomson/First Call, just one has K stock rated a “buy.” The other 17? Eleven “holds” and six “sells” — an awfully bearish statement from the typically overly optimistic analyst industry.
Look, I grew up with Cocoa Krispies and Frosted Flakes (though sometimes I went healthy and put bananas on top), but these sugar vehicles are on their way out. Look in your local grocery aisle. They’re still there, but they’re taking up increasingly less shelf space while the hyper-bran cereals keep stretching their legs.
If for whatever reason you’re set on investing in breakfast, you’d be better off with a more diversified play like Post Holdings Inc (NYSE:POST), which not only does cereals and other breakfast foods, but also dried fruits, cheese and other dairy products, and high-protein shakes. Plus, Post continues to diversify — it bought the PowerBar and Musashi brands from Nestle SA (OTCMKTS:NSRGY) last year.
Bottom line, stay away from K stock in the near term. Kellogg has a lot of work to do before they become an attractive stock buy for investors.
As of this writing, Scott Michnick did not hold a position in any of the aforementioned securities.
