Kellogg Co., like many other food companies, has steadily raised prices to manage rising 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 K,
Neutralized the stock from Buy and cut its price target to $74 from $81.
“Kellogg’s stock ranks second in our year-to-date coverage, but we are concerned that the company will experience significant inflation over the next 12 months and may find it difficult to pass on price going forward in light of Walmart/Target/Kroger’s recent commentary to cut costs in the food and beverage categories,” led by Cody Ross. analysts said.
Kellogg shares are up 12.3% for the year to date. The broader S&P 500 index SPX,
It has fallen by 18.4 percent.
Chief Executive Doug McMillan discussed the inflationary environment and the company’s response on the first-quarter earnings call in May.
“While we have experienced high levels of inflation in our international markets over the years, it is unusual for US inflation to be this high and moving so fast in both food and general goods,” he said, according to FactSet.
“We control what we can control, reduce our inventory levels and lower prices as much as we can, especially when opening price-point food items, while improving our profit performance.”
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UBS analysts published a “trade down analysis” along with its Kellogg’s downgrade, finding that private labels are making a comeback.
“If private label volumes rebound to pre-Covid trends, we expect retailers to push back more strongly against future price increases, causing our cover companies to make a tough decision between market share or margin,” UBS wrote in that report.
“We believe that private label volume is the most important factor that dictates the durability of CPG’s pricing power.”
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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 citing higher spending. Groceries is one of the most important categories on the chopping block.
UBS analysts are also upset about the level of uncertainty from the spinoff of Kellogg’s cereal and plant-based foods businesses.
Kellogg’s brands include Pop-Tarts, Apple Jacks, Morningstar Farms, Pringles and Eggo.
Read: Analysts say the Kellogg breakup isn’t as big a deal as the Kraft-Mondelez split
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“While the company does not plan to issue an update for another ~12 months, we believe the investment case is more murky today and therefore better sidelined,” UBS said.