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Kellanova beats profit expectations, but high prices are hurting sales

By Tomi Kilgore

Sales volume declines, pressured by 'rising elasticity' across all product categories

Shares of Kellanova, formerly known as Kellogg, climbed Thursday as the snacks and cereal company, whose brands include Pop-Tarts, Cheez-It and Special K, beat fourth-quarter profit expectations, with price increases offsetting a decline in volume.

The company (K) said the better-than-expected results for the quarter, which began with the spinoff of WK Kellogg Co. (KLG) on Oct. 2, were fueled by growing sales and profit margin and improved service levels.

"These factors more than offset the impact of a continued rise in price elasticities across categories and markets, reflecting financially constrained consumers," the company said in a statement.

Read more about price elasticity, and what it means for sales.

The stock rallied 4% in morning trading, putting it on track for the biggest one-day post-earnings gain since it rallied 7.1% on May 6, 2021.

The company reported ahead of the open that it swung to fourth-quarter net income of $27 million, or 8 cents a share, from a loss of $99 million, or 29 cents a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share of 78 cents topped the FactSet consensus of 74 cents.

Sales edged up 0.3% to $3.17 billion, above the FactSet consensus of $3.07 billion.

For North America, sales fell 0.8% as a 5.7% increase in price and mix was offset by a 6.5% drop in volume, which was pressured by "rising elasticity across categories."

Snack sales were roughly flat amid less innovation, particularly in crackers, while sales in the frozen category declined 5% as Eggos consumption turned negative.

Meanwhile, Europe sales rose 9.3%, as an 18.1% surge in pricing and mix countered a 7.8% drop in volume, while Latin America sales climbed 13.9%, as a 6.1% rise in prices and an 8.6% favorable bump from foreign-currency translation offset a 0.8% dip in volume.

In the Asia Pacific, Middle East and Africa region, sales fell 9.9%, as a 13.6% rise in prices and an 8.4% increase in volume was negated by a 31.9% unfavorable current impact.

Separately, free cash flow came in at $968 million. On the post-earnings call with analysts, Chief Executive Steven Cahillane said that was more than anticipated and was "used opportunistically to accelerate share repurchases."

The stock has advanced 7.4% over the past three months, while the Consumer Staples Select Sector SPDR exchange-traded fund XLP has gained 7.5% and the S&P 500 has rallied 13.9%.

-Tomi Kilgore

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02-08-24 1126ET

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