Sometimes a long-term corporate strategy can cause near-term pain for shareholders. Packaged foods manufacturer Kellogg (NYSE:K) reported fourth-quarter 2019 earnings on Thursday morning, and as a consequence of significant decisions made last year, the company issued a tepid 2020 outlook that disappointed investors. Shares were trading down nearly 8% at midday. Below, we'll review the essential details from the last three months, and discuss why Kellogg's outlook reveals a weakness that may persist throughout 2020.
Note that all comparable numbers that follow refer to those of the prior-year quarter.
Kellogg: A bird's-eye view of the numbers
|Metric||Q4 2019||Q4 2018||Change (Decline)|
|Revenue||$3.22 billion||$3.32 billion||(3%)|
|Net income (loss)||$145 million||($84 million)||N/A|
|Diluted earnings per share (loss)||$0.42||($0.24)||N/A|
Highlights from the quarter
- The reported sales decline of 3% stemmed from a negative impact of 6 percentage points related to Kellogg's divestiture of several noncore businesses last year in the categories of fruit snacks, ice cream cones, cookies, and pie crusts. But organic revenue (i.e., reported revenue adjusted for acquisitions, divestitures, and foreign currency translation) improved by 3% against the prior-year quarter.
- Kellogg North America, the company's largest segment, posted an organic sales increase of 1.3% to $1.9 billion, led by snacks and double-digit growth in plant-based meat alternative MorningStar Farms. The company reported that a trend of declining cereal sales in this segment moderated during the quarter.
- The European segment enjoyed an advance of 3% in organic revenue to $527 million. Results were also driven by snack consumption, and in particular, momentum in the Pringles brand.
- Organic revenue expansion in the Asia Pacific, Middle East, and Africa region jumped by 8.3% to $569 million, largely on the strength of Pringles and noodles sales in Africa. Kellogg's smallest segment, Latin America, realized a slight 0.4% improvement in organic growth, to $235 million.
- Operating margin improved by 240 basis points to 11.2%.
- The difference between net earnings seen in the table above is due to one-time charges taken in the fourth quarter of 2018, which produced a net loss that quarter. On an adjusted basis, Q4 2019 earnings per share of $0.91 were flat against Q4 2018, as a loss of earnings from the divested business lines offset other positive earnings factors in the current quarter.
The 2020 forecast: A problematic outlook
Alongside earnings, Kellogg presented its 2020 guidance, forecasting an organic revenue increase of 1% to 2% for the full year against 2019. But the consumer staples multinational advised investors to expect a currency-neutral decline in adjusted operating profit of 4% in the current year, and a decline in diluted EPS between 3% and 4%.
The projected profit bleed is due to the impact of Kellogg's noncore brand dispositions. That the departed businesses would leave such a significant dent in earnings seems to have caught investors by surprise. The decision to exit products in categories like ice cream cones and cookies will help the company reap faster growth in its core lines of snacks and cereals over the long term. But for the present, selling off significant assets has dampened earnings prospects for the next several quarters.
Where will Kellogg's stock go from here? The opportunities for material earnings surprises are limited due to the company's expectation of extremely mild top-line growth in 2020. Of course, cost-cutting or a strategic acquisition or two could act as share price catalysts during the year. Overall, however, shareholders may do well to keep near-term expectations for Kellogg's financial and market performance in check.