Kellogg’s labor strike to eat into margins as supply woes mount

By Mehr Bedi

(Reuters) – A nearly three-month long labor strike at Kellogg’s U.S. cereal plants is expected to dent profit margins already under pressure from steep costs driven by global supply logjams.

The strike kicked off in October at four U.S. plants that produce Froot Loops, Corn Flakes and other cereal brands, constraining the company’s production capacity and forcing it to hire temporary workers.

“We believe the impact of the strike could well persist for several months or longer and require sizeable investment to repair,” Barclays analyst Andrew Lazar said in a note.

Kellogg is slated to report its fourth-quarter results on Thursday.

Most packaged food companies are struggling with supply chain disruptions and inflation, but Kellogg faces the additional challenge of regaining momentum in its key U.S. cereal business, Lazar said.

The context

The strike accounted for nearly 20% of the cereal maker’s business and saw around 1,400 workers demand better pay and enhanced benefits in a tightening labor market.

“(Kellogg) is now emerging as the company facing the highest input cost pressures in our coverage,” Bernstein analyst Alexia Howard said.

Margins at packaged food makers including Mondelez International Inc and Conagra Brands Inc have also taken a hit in recent months from rising costs of transportation, packaging and raw materials such as wheat, corn and edible oils.

Kellogg profit margins over the course of the pandemic – https://graphics.reuters.com/KELLOGG-RESULTS/mopanyddbva/chart.png

The fundamentals

** Analysts project a quarterly gross profit margin of 31.5% for Kellogg, compared with 34.2% last year.

** Net income for the fourth quarter is estimated at $272.48 million, or $0.79 per share, higher than the $208 million, or $0.59 per share, reported last year.

Kellogg North America sales over the past two years – https://graphics.reuters.com/KELLOGG-RESULTS/jnvwelkxkvw/chart.png

Wall street sentiment

** The current average analyst rating for Kellogg is “hold”, with a median price target of $67.

** The company’s shares have fallen about 4% this year, following a 3.5% rise in 2021.

(Reporting by Mehr Bedi in Bengaluru; Editing by Devika Syamnath)