The Stockout: Kellogg Maintains Formal Earnings Guidance Despite Headwinds

Kellogg Co. manages to reaffirm earnings guidance despite both industrywide and company-specific challenges. I find it impressive that the company was able to retain its guidance for both operating profit and earnings despite the acceleration in inflation during the third quarter and the ongoing strike in its flagship North American cereal business. Although, some would argue that the company's comments on its analyst call (that earnings will likely come in at the low end of its previously announced guidance range and that the ongoing cereal worker strike has created a wider range of potential outcomes) are tantamount to a guidance cut. Still, in the third quarter, the company offset industrywide headwinds (inflation, labor shortages, and supply chain disruptions) and its own company-specific issues (the cereal worker strike and a fire at a Memphis, Tennessee, cereal plant) with better-than-expected 5% year-over-year growth in organic sales that is being driven by increased product penetration in foreign and emerging markets. Pringles, Cheez-It, and Pop-Tarts are among the company's brands that are growing internationally. 

Kellogg sees inflation and supply chain issues intensifying. The company's costs in the third quarter inflated in the high-single digits with inflation intensifying over the course of the quarter. Kellogg called out packaging as being particularly inflationary in the third quarter. The company is in active negotiations with its union that represents about 1,400 workers at four cereal plants. The company didn't say much about the strike on Thursday's analyst call other than that employees should expect a raise on top of already market-leading wages. Management has responded to the cereal production disruption by leveraging its global supply chain (i.e., sourcing cereal produced in geographies unaffected by the strike) and utilizing white-collar employees to temporarily fill those roles. Still, cereal (which represents 20% of the company's global business) remains the Kellogg category experiencing the most product availability issues. The company has also responded by pulling back on advertising products where there are availability issues.

Shipments of Estée Lauder cosmetics for holiday 2021 were pulled forward to its fiscal Q1 2022 (quarter ending Sept. 30, 2021) as retailers looked to avoid supply chain disruptions. Most of the company's holiday shipments are already in place at retailers, which is unusual this early in the holiday season. In its latest earnings report, the company said the pull-forward contributed 1.5 percentage points to the company's sales in its fiscal Q1 2022 and cited airfreight delays and transportation rate inflation as motivation for the early shipments. Unlike some other consumer goods companies, Estée Lauder is not fully offsetting the impact of inflation and supply chain challenges with sales growth — the company cited supply chain challenges when explaining why its fiscal Q2 2022 (the three months ending Dec. 31) sales guidance of 8%-10% y/y was below the consensus forecast of 12%-13%.

Air cargo rates are up sharply, year-over-year, in the major trade lanes, as shown in the SONAR chart below. Cosmetics are often transported via air cargo due to their high value, small size and service requirements (some cosmetics melt under high temperatures, for instance). 

Oat prices rise amid both rising demand and tight supplies. Oat demand is rising due to the perceived health benefits and growth in certain food categories, such as oat milk. At the same time, oat supplies have been impaired by drought conditions in the oat-growing regions in the U.S. and Canada. As a result, oat futures have reached a record high per the CME Group, up 62% y/y. 

This week, the Good Food Institute published a letter, coinciding with the COP26 summit, arguing that plant-based food substitution is critical for meeting climate goals. According to the Good Food Institute, plant-based and cultivated meat cut emissions by up to 92% versus traditionally sourced meat. In its report, the group cited a Nature Food study that found that animal agriculture emissions are responsible for one-fifth of human-caused climate change. In light of the greater focus on climate change, I expect plant-based substitution to continue to be one of the biggest trends in packaged food in the coming years.

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