The world's largest ready-to-eat-cereal maker, Kellogg
Is there light at the end of the tunnel?
A glance at the quarter
International markets could offer some hope. General Mills
Kellogg's investments in its supply chain brought down net income by 14% compared to the previous year. Earnings per share of $0.80 didn't meet analysts' predictions of $0.89 per share.
Quality comes first
Earlier this year, U.S. regulators found listeria bacteria at a Kellogg plant in Georgia. Separately, the company had to recall nearly 28 million boxes of cereal and Keebler cookies after consumer complaints of an unusual smell.
The embarrassing recalls, safety concerns, and inventory shortages have made Kellogg extremely conscious of its quality-control measures. The company is focusing on rebuilding itself. It's strategically spending on replacing equipment, expanding capacity, and training employees. Following that, the company plans to strategically spend on advertisement and promotion of various brands to build consumer interest.
These investments have affected the bottom line of the company. Increasing costs and supply-chain investments pulled down gross margin to 40.8% from 43.4% last year. And, it'll continue to do so for a while now as Kellogg sees the infrastructure remodeling as a multiyear program to "drive reliability."
Foolish final thought
Kellogg's strategic spending on supply chain and advertisement might act as possible remedies to bring the company back into shape. The company has to prove its resilience in a challenging market, which won't happen overnight. But considering that Kellogg has the potential to get back on track sooner or later, I see this drop in stock price as a buying opportunity.
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Navjot Kaur does not own shares of any company mentioned in this article. Motley Fool newsletter services have recommended buying shares of Kellogg. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.