Kellogg’s is experiencing a faster recovery in its gross margin than expected, indicating a positive shift in industry “bottlenecks”. Despite facing significant pricing challenges over the past few years to compensate for rising input costs, the company’s gross profit margin has increased by over 100 basis points on an adjusted basis in the second quarter.
The Chief Financial Officer (CFO), Amit Banati, stated that the recovery is progressing ahead of schedule, thanks to the gradual elimination of bottlenecks and shortages. This has reduced inefficiencies and additional costs experienced in the past year. Additionally, improved productivity and revenue growth management have helped to counter high market-driven input cost inflation.
On an adjusted basis, the margin rose by 130 basis points in the quarter, reaching 33.7%. Year to date, it increased by 110 basis points, totaling 32.5%. The margin also climbed to 33.1% and 32.1% on a currency-neutral basis for the quarter and year to date, respectively, although it still falls behind the pre-Covid level of 33.7% in 2019.
Banati affirmed the company’s confidence in recovering margins, stating that while there is still progress to be made, their performance in the second quarter reinforces their ability to achieve this goal. Kellogg’s expects a margin expansion of approximately 50 basis points for the full year, although analysts have questioned this outlook.
In response to concerns, Banati clarified that the gross margin’s positive trend is expected to continue, supported by the strong performance of the supply chain and improved service levels. Although there may be some quarterly variations due to seasonality, the underlying expectation is that the gross margin will continue to rise in the second half of the year.
Price versus volume
Kellogg has raised its organic growth outlook for the second time this year, reflecting a 7.1% increase in sales during the quarter, reaching $4.1 billion. Sales for the half-year period amounted to $8.3 billion, representing a 10.3% increase.
While pricing contributed to top-line growth, volumes experienced a decline. In the second quarter, pricing and mix accounted for 14.7%, leading to a volume decline of 7.6%. Year to date, pricing and mix reached 15.1%, with volumes down by 4.8%.
Banati explained that some of the volume decrease was related to the rebuilding of cereal inventories following last year’s plant fire in Pennsylvania and worker strikes at four US facilities. Additionally, he noted that price elasticities have been increasing worldwide, resulting in lower volumes. However, there have been no significant shifts towards private label products.
Looking forward, Kellogg is optimistic about volume improvements and anticipates a sequential increase. The company has also raised its guidance for operating profit and earnings per share. Adjusted operating profit, on a currency-neutral basis, increased by 15.8% in the first half of the year, amounting to $1.1 billion. It is expected to grow by 9-10% for the full year.
Earnings per share, adjusted and currency-neutral, rose by 3.9% year to date, reaching $2.37. The projected decline for the full year has been adjusted to a range of 1-2%, compared to the previously estimated 1-3% decrease. However, net income for the year so far has decreased by 13% to $664 million.
Kellogg’s CEO, Steven Cahillane, acknowledged the unprecedented challenges faced by the industry due to input cost inflation. Despite this, he expressed confidence in the company’s ability to drive quality merchandising in the second half of the year.
