RXBar recall and declining cereal sales dent Kellogg’s Q1 bottom line

The Battle Creek, Michigan-based breakfast foods and snack producer recalled more than a dozen of its protein bar flavors in December 2018 due to an undeclared peanut allergen in an ingredient supplied by a third-party supplier.

No adverse cases were reported, however, the costs involved in the recall, combined with an almost 5% decrease in cereal sales in North America, saw Kellogg’s first-quarter earnings drop by 36.5%.

The company posted a net income of $282m for the first quarter ended March 30 2019, down from $444m for the same period a year ago.

“Our recall of certain RXBars required inventory write-offs at our customers, pressuring net sales and profit,” said Steve Cahillane, Kellogg’s chairman, CEO and president.

Reason for declining cereal sales

He accredited the decrease in the company’s RTE cereal business from the timing of shipments and a transition to new pack sizes on certain brands.

“We knew the transition of certain brands to the harmonized pack sizes would create some initial softness, particularly as we held off promoting those brands,” said Steve Cahillane, Kellogg’s chairman, CEO and president.

“In fact, during the first two weeks of January, our consumption was down 6%, but it was down only about 1% for the rest of the quarter, in line with the category during those remaining weeks.

“While our consumption trend didn’t change much overall, our shipments definitely lagged in the quarter, suggesting a reduction in trade inventory.

“While sizable and fairly sudden this quarter, it is not uncommon to experience these timing differences. This is probably more related to previous quarter’s timing differences rather than to any new trend.”

Innovation paying off

Cahillane added the company’s iconic snack brands were showing the benefits of recent marketing and innovation efforts.

“Pop-Tarts returned to growth in the second half of 2018, and in Q1, we launched a new Bites line, which is off to a great start,” he said.

“Cheez-It accelerated its growth, and its new Snap’d line is off to a good start as well.

“Rice Krispies Treats continues to grow, augmented by its new Poppers offering and aided by newly added capacity. And Pringles continues to grow even on top of its year-ago acceleration, with new Wavy also off to a good start,” said Cahillane.

On the frozen front, he reported the company “continued to grow our highly successful Thick & Fluffy premium waffle line [and] our pancake business, and we have exciting news with innovation on our core kid offerings.

“We will look to build on this momentum in Q2 with two exciting launches: a new higher-protein offering called Off The Grid and a brand-new Thick & Fluffy french toast line,” added Cahillane.

International regions also showed growth. Sales in Europe accelerated its growth – although falling 4%; while sales in Asia, Middle East and Africa (AMEA) increased by 60%.

Long-term impact of divestiture

During the quarter, Kellogg announced the sale of its cookies, fruit snacks, piecrusts and ice cream cones business to Ferrero, in a transaction valued at $1.3bn. The brands include Keebler, Famous Amos, Mother’s and Murray cookies, Stretch Island and Fruit Snacks fruit-flavored snacks and Keebler’s ice cream cones and piecrust products.

“Longer term, this divestiture should have a positive impact on our long-term growth and return on invested capital,” said Fareed Khan, Kellogg’s chief financial officer, who is set to leave the company on July 1 after two-and-a-half years in the role.

Amit Banati, currently president of Kellogg AMEA, will succeed Khan. Banati joined Kellogg in 2012, previously holding positions at Mondelēz International and Procter & Gamble Co.

Kellogg’s lowered its full-year forecast to adjust for the impact of the pending divestiture.