US cereal-to-snack group Kellogg reported it has successfully strengthened its operating margins during 2016 but failed to halt a drop in revenue with more of the same forecast for the coming year.
Kellogg revealed net sales decreased by 3.8% in 2016, continuing the negative top-line trends seen in fiscal 2015. The company, which has been battling weak trends in the cereal category in particular, said its top-line issues were exacerbated by currency headwinds this year. Kellogg was, however, able to report improved operating profit as the company reaped the benefits of its efficiency initiatives, including the implementation of zero-based budgeting and its Project K reorganisational programme.
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The decrease in Kellogg’s underlying sales trends was less steep than the net figure. What Kellogg calls its “currency-neutral, comparable net sales, excluding Venezuela, fell by 1.1% in 2016. The metric excludes the impact of factors such as forex, M&A and Kellogg’s business in Venezuela deconsolidated in the fourth quarter. The result may come as a disappointment, however, given Kellogg had returned its underlying sales to positive territory during 2015.
Over the past three years, Kellogg has successfully strengthened its operating margin through a focus on delivering cost savings and trying to build a leaner machine. Management indicated margin expansion remains a key priority for Kellogg and yesterday (8 February) the firm revealed plans to change its direct store delivery model in the US in order to further streamline the business and reduce complexity.
Outlook
With margin targets front-and-centre, Kellogg management indicated it expects to grow currency-neutral operating profit by 7-8% over the coming year. Operating profit margin is forecast to expand by “more than a full percentage point” and the company said it is on-track to deliver on its previously communicated target of a 350 basis point expansion in operating profit between 2015 and 2018.
Comparable sales in 2017 are, however, expected to continue their descent. Kellogg forecast a 2% drop in organic sales over the period. The company said that decrease would be due to the changes it is making to its US DSD network, with the rest of the business likely to be flat-to-down 1% in 2017.
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By GlobalData
