WK Kellogg: Boycott Didn't Cause Sales Catastrophe

Core Viewpoint - WK Kellogg Co reported Q2 results showing revenues in line with analyst estimates but weaker profitability, impacted by a social media boycott and ongoing industry challenges [1][3][12] Financial Performance - Q2 sales were $672 million, reflecting a year-on-year decline of -2.7%, slightly better than the consensus estimate of $671 million [3] - The adjusted EPS was $0.36, missing Wall Street estimates by $0.05, while the adjusted gross margin expanded to 30.2% [4] - Adjusted EBITDA margin decreased by 1.1 percentage points year-on-year to 11.6% but increased sequentially by 1.0 percentage points [4] Market Context - The cereal industry is facing overall weakness, with competitors like General Mills and Post Holdings reporting significant sales declines [3][8] - A boycott against WK Kellogg was promoted on social media, but its impact on sales was minimal compared to industry trends [3][12] Strategic Initiatives - WK Kellogg is modernizing its supply chain with planned capital investments of $390 million, aiming for a 5.0 percentage point adjusted EBITDA expansion by 2026 [6][7] - The company is reviewing its manufacturing footprint, which includes production increases in some plants and closures in others [7] Future Outlook - The company reaffirmed its 2024 financial guidance, expecting standalone adjusted revenues to remain flat with a slight decline of -1% to 1% growth [5] - Long-term growth prospects are concerning due to a shift in consumer preferences towards cheaper private label alternatives, which may impact branded cereal demand [8][12] Valuation Insights - A discounted cash flow model estimates WK Kellogg's fair value at $24.89, indicating a potential upside of 54% from the current stock price [10] - Peer valuation shows WK Kellogg is undervalued compared to competitors, with an EV/EBITDA of 5.4 versus an average of 14.2 for peers [11]