This month, Kellogg Company's (NYSE:K) fourth-quarter results disappointed investors. The cereal giant's quarterly comparable sales slid 2.2%, and comparable earnings dipped 1.2% to cap off a stagnant year. Yet CEO John Bryant believes the company is taking big steps to turn the tide. In Kellogg's fourth-quarter conference call, Bryant revealed five important nuggets of information Kellogg investors should know.
A year of rebuilding in 2015
Kellogg's earnings release came with the big news that its long-term sales guidance had been cut. Whereas long-term sales growth targets had been 3%-4%, the company's new target is 1%-3%. Further, Kellogg projects flat sales in 2015. Bryant was quick to note, however, that flat sales in 2015 would be an improvement over 2014 and is a sustainable target:
The guidance we are providing today is realistic and reflects the investment necessary to stabilize our business and return it to sustainable growth. We expect that comparable net sales will be approximately flat for the year, an improvement when compared to the performance we saw in 2014. -- John Bryant
Bryant continued by stating that while he expects core cereal brands to rebound, that low single-digit growth was a likely target, and growth must come from other avenues.
Not all health foods are created equal
The struggles with Kellogg's traditional U.S. morning foods are expected and common throughout the industry. For example, Post's (NYSE:POST) traditional cereal segment saw a sales decline of 8.8% in its most recent quarter. However, Post's organic and non-GMO cereal brand, Attune Foods, saw comparable net sales growth of 9.1%. It stands to reason that consumers are seeking healthier alternatives, but as Bryant noted in the call, Kellogg's "healthy" brands are part of the problem.
[The U.S. Snacks business'] comparable net sales declined by 3.1% in the fourth quarter, and by 2.4% for the full year. As we saw last quarter, and in other categories around the world, the decline in sales was largely due to consumer trends away from weight management brands. -- John Bryant
Once-popular health snacks like "Right Bite 100-calorie packs," Special K bars, and Fiber Plus bars, have been a drag on Kellogg's snacks division. Health-conscious customers are looking for much more than low-calorie foods today, and Kellogg needs to evolve to a more natural and less processed line-up.
Kashi and Special K reboot is key
In 2012, the once-popular health brand Kashi shocked customers by revealing that its soybeans contained GMOs; it has carried the stigma of not being "organic enough" since. To trigger growth, Kellogg investing in several rebranding efforts of its health and weight management brands.
We are investing in our food. We are launching new Special K products, such as gluten-free and protein. We are continuing to evolve the Kashi GOLEAN brand, certified GMO-free, and we're making the Kashi Heart to Heart brand to USDA organic. -- John Bryant
Project K will boost innovation
"Project K" is Kellogg's multi-year efficiency and cost reduction plan that includes cutting workforce, consolidating plants, and maximizing efficiency. One nice note for the call is that Kellogg is using the savings from Project K to reinvest in the rebranding of products like Kashi, and in that way, Project K is leading to innovation.
If you look at what we've done with the Project K savings in 2015, we've invested it back into the capabilities that over time will enable us to grow our top-line. So we have invested back into our global category teams. We have invested back into rebuilding the Kashi team. We've invested back into our sales force in snacks and Morning Foods in the U.S. Those investments do not provide an immediate return. -- John Bryant
Project K is delivering savings in 2015
We expect that incremental savings from Project K will be between $90 million to $100 million for the full year, approximately two-thirds of which will come in cost of goods sold. -- John Bryant
The good news is that Project K is on track, it's leading to savings, and Kellogg's management is smart enough to know it needs to reinvest those savings. It has an admittedly uphill battle in developed markets, comparable net sales in the U.S. morning foods segment declined 7.7% for the quarter and 5.7% for the full year. There were bright spots in emerging markets, especially Latin America, but the company must turn developed markets around.
In my opinion, it is not wise to expect that growth to come from traditional cold cereals. According to this report from The NPD Group, annual cereal sales in the U.S. have dropped by $3.9 billion since 2000. Turning to post again, the model for that company's growth has come from private-label products and peanut butter, and Kellogg too must focus outside of the cereal bowl. That's why the rebranding efforts of Kashi and Special K are so key; health food is Kellogg's lowest hurdle to growth. Only time will tell if these efforts will pay off, but at least we know that Kellogg's management can see the problem.
Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Post Holdings. The Motley Fool owns shares of Post Holdings. 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.