Kellogg Co., like many other food companies, has steadily raised prices to manage increased costs and inflation, but UBS analysts are concerned that the food company will soon face opposition to price hikes from major retailers.
UBS downgraded Kellogg
shares to neutral from buy and cut its price target to $74 from $81.
“Kellogg’s stock is up the second most in our coverage year-to-date, but we are concerned that the company is going to experience a significant amount of inflation over the next 12 months and will likely have difficulty passing through as much price going forward in light of Walmart’s/Target’s/Kroger’s recent commentary to keep costs down in food and beverage categories,” analysts led by Cody Ross said.
Kellogg shares are up 12.3% for the year to date. The broader S&P 500 index
has slumped 18.4%.
Chief Executive Doug McMillon discussed the inflationary environment and the company’s reaction to it during the first-quarter earnings call in May.
“While we’ve experienced high levels of inflation in our international markets over the years, U.S. inflation being this high and moving so quickly, both in food and general merchandise, is unusual,” he said, according to FactSet.
“We’ll control what we can control, reduce our inventory level, and keep prices as low as we can, especially on opening price-point food items, while improving our profit performance.”
UBS analysts published a “trade down analysis” alongside its Kellogg’s downgrade, finding that private labels are making a comeback.
“If private label volume retraces to pre-Covid trends, we expect retailers will push back more forcefully against future price increases, causing our covered companies to make a difficult decision between market share or margin,” UBS wrote in that report.
“We believe private label volume will be the most important factor dictating the durability of CPG’s pricing power.”
A June consumer sentiment survey conducted by Cowen analysts shows that 68% of shoppers plan to cut their spending or have already done so, with many saying it’s because of higher costs. Groceries is one of the key categories on the chopping block.
UBS analysts are also uneasy about the level of uncertainty from the spinoff of Kellogg’s cereal and plant-based food businesses.
Kellogg brands include Pop-Tarts, Apple Jacks, MorningStar Farms, Pringles and Eggo.
“Given the company does not plan to provide an update for another ~12 months, we believe the investment case is more murky today and therefore believe it is best to move to the sideline,” UBS said.