Kellogg misses sales mark as it battles supply constraints for Frosted Flakes, MorningStar Farms

Analysts expecting sales of $3.51b during Kellogg’s fourth quarter earnings released yesterday were disappointed by the company’s net sales for the period peaking at $3.46b. While company executives touted this as a 2.5% increase in organic net sales from Q4 last year, analysts lamented it was below street estimates of 3.2%.

“We worry that Kellogg’s organic sales growth this quarter seems to be lagging its peers,”​ reflect Bernstein analysts in a same date note in which they rated the company “underperform.”

Indeed, TreeHouse Foods reported the same day a 4% increase in organic net sales in its fourth quarter, and General Mills reported in December its organic net sales for the second quarter of fiscal 2021 were up 7% to $4.7b. Post Holdings, however, reported Feb. 4 that net sales for its first quarter of fiscal 2021 were flat at an increase of just 0.1%.

While acknowledging some setbacks, Kellogg executives sought to frame the growth as positive – even exceeding its own guidance, which CFO Amit Banati noted the company raised twice during a year with “unprecedented uncertainty.”​

He explained that the company expected net sales growth to slow in Q4 as it had in Q3 compared to highs in Q2, during which many economies had locked down and consumers were stocking their pantries as they remained under stay-at-home orders. But he added, when the sales surges of the other three quarters are factored in, the company saw a organic net sales increase 6% to $13.8b for the year.

Frosted Flake supply constraints cost company marketshare​

Not all of the slowdown in Q4 was expected, however. CEO Steve Cahillane acknowledged the company suffered capacity constraints during the quarter for some of its brands, including Frosted Flakes.

“Nobody anticipated, obviously, the type of year that cereal would have. The category grew nearly 9%, slowed down a little bit in the second half, but still saw 5-6% growth,”​ he said. “We work very hard all year to keep up with demand and keep our service levels as high as we possibly could, and we ended the year with a flat share performance that slipped a little in the fourth quarter.”​

He attributed “almost all of that slippage”​ to Frosted Flakes supply challenges, but added that “as we enter 2021, we continue to build against capacity, we continue to make good improvements, and we continue to be very optimistic as we go through the first half of this year. We are going to get better and better in terms of that capacity, and therefore, we’ll get better and better in terms of our sheer performance.”​

MorningStar Farms tests “bounds of capacity”​ but innovation forthcoming​

Frosted Flakes was not the only brand to suffer supply constraints in the last quarter, however. MorningStar Farms also “tested the bounds of capacity”​ as consumption increased nearly 26%, Cahillane acknowledged.

However, he later added, the company feels good about its capacity relative to demand and dismissed the idea that MorningStar Farms or its recently launched subsidiary Incogmeato were “disrupted.”​

He noted that Incogmeato, which launched during the pandemic, is up about 4 points of share and its velocities exceed “some of the smaller players”​ and those of “early MorningStar Farm launches at the same stage.”​

He also teased innovation for the new brand that will include plant-based chicken alternatives, including Disney royalty chicken offerings that are coming “to the fore right now.”​

Kellogg enters 2021 in 'very solid financial condition'​

Despite some setbacks, Cahillane said the company is entering 2021 “in very solid financial condition”​ with growth momentum across regions and brands that are in “good health”​ thanks in part to consistent marketing support during the pandemic.

Still, the executive team acknowledged that lapping the sale surges from early in the pandemic will likely not be possible in 2021, although they say the company is well positioned to maintain market share and new consumers.

As such, Kellogg tempered its expectations for 2021, predicting that organic net sales will be down 1% versus the 6% achieved in 2020 for a 2.5% compound annual growth rate versus 2019. This is in line with street expectations that sales will drop 1.2%.

However, analysts are not as optimistic as Kellogg, citing concerns that its organic sales are slowing more quickly than competitors, and as such say they will be watching the company closely in coming quarters.