Kellogg’s warns of price hikes to offset bottom line already battered by record inflation and supply-side disruption

Kellogg’s warns of price hikes to offset bottom line already battered by record inflation and supply-side disruption

The company saw operating profits fall by 14% in the fourth quarter of 2021 to $329m, while net sales contracted by 1.3% to $3.42bn from $3.5bn (beating the consensus estimate of $3.39bn).

The latest results undid positive gains in the first three quarters of last year, with full-year profits down 2% on 2020. 

Fourth-quarter earnings was $0.80 per share, which represents a year-over-year decline of nearly 7% from $0.86 per share seen in the same period a year ago.

Adjusted gross margin for the fourth quarter fell to 30.2% from 34.2% a year earlier, while net income attributable to Kellogg more than doubled to $433m, or $1.26 per share.

Piling on the pressure

“I think we can all agree that 2021 was yet another unprecedented year,”​ CEO Steven Cahillane told analysts on a call.

“In addition to lapping an unusually strong 2020, we managed through an operating environment that was more challenging than any other that we can remember.

“The pandemic persisted, requiring a sustained focus on employee safety, giving back to our communities and working differently. Bottlenecks and shortages on everything from labour to materials to freight impeded supply across the global economy and created incremental costs and inefficiencies that were difficult to plan for.

“Finally, there was one more extreme challenge in 2021, the acceleration of cost inflation to levels the industry hadn’t seen in a decade.”

He added pressure on the company was further exacerbated by labour shortages from a three-month labour strike across all four of its US cereal plants, while a fire at one of its factories in December also significantly reduced its production capacity.

“The fire further strained our network and our ability to build inventory, which served to worsen the situation when we experienced the labour strike.

“We are pleased to have our team back to work. Strikes are painful for everyone, and not only did this strike affect our employees’ lives, it also had a near-term financial impact on the company. It negatively impacted sales and profit in the fourth quarter of 2021, and it will have carryover cost impact in quarter one 2022. It will also have sales impacts through the second quarter as we continue to rebuild inventories.”

Price hike for Pringles, Pop-Tarts and more

Cahillane added that ‘double-digit’ cost inflation is expected in the first half of the year, which Kellogg’s plans to combat by passing it on to customers through raised product costs.

This planned price increase, however, means the Battle Creek, Michigan-based company was able to update its guidance for 2022, projecting net sales growth of 3%, with operating profit and earnings per share (EPS) forecast to rise by 1-2%.

“So, we’re in good condition as we head into 2022,”​ said Cahillane.

“Our international regions continue to demonstrate very strong momentum, each growing ahead of their long-term targets and featuring strong in-market performance and responsible price realization.

“In North America, our snacks and frozen businesses are showing momentum with two-year compound annual growth in consumption led by leading world-class brands.”

Still significant optimism for 2022

“Kellogg’s managed to deliver full-year financial results consistent with its guidance across all metrics, despite a challenging environment that included high-cost inflation, worldwide supply disruptions and instability in its North American facility,”​ Walid Koudmani, market analyst at financial brokerage XTB told BakeryandSnacks.

“While the company expects performance to continue improving through 2022, record inflation and potential supply chain disruptions may prove to be significant hurdles.

“On the other hand, continued expansion in the snacks segment and across emerging markets is providing investors with significant optimism heading into the new year and could ultimately be a key to maintaining this positive performance.”

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