WK Kellogg Co (KLG) is determined to take Frosted Flakes into the future.
On Monday, the company behind cereal brands such as Froot Loops, Mini-Wheats, and Rice Krispies split from Kellogg's snacking business — now known as Kellanova (K) — which makes Cheez-It crackers and Pop-Tarts among other treats.
The focus of the newly spun-off WK Kellogg Co will be on building up its cereal business after it had been deprioritized for years, according to CEO Gary Pilnick.
"Over the years, cereal has gotten investment, but it was more about maintaining the business not modernizing it," Pilnick told Yahoo Finance over the phone. "Now, everything we're going to be doing is in service of cereal. We're going to do things very, very differently, and we're confident we'll be able to drive substantial growth as we do it."
Kellogg searches for a new direction
The spin-off comes at a crossroads for the cereal industry, which is worth nearly $22 billion.
The cereal craze that took off during the pandemic has dwindled as consumers have started to push back on higher prices. While revenue has risen in recent years, volumes have stayed roughly flat, according to data from Statista.
Kellogg's Frosted Flakes trails behind General Mills' (GIS) Cheerios for the top spot in North American cereal brands, according to Zippia. There's still room for Kellogg to take market share, but the company faces competition from a few companies that, along with WK Kellogg, dominate the space: General Mills, Post (POST), and PepsiCo-owned (PEP) Quaker Oats.
But that hasn't deterred WK Kellogg. The CEO emphasized that the independent company is "now a 117-year-old startup" that can balance its legacy as well as future growth.
Founded in 1906 by William Keith Kellogg, whom the company is named after, the business got its start by selling toasted cornflakes that changed how people have eaten breakfast ever since.
Kellogg was "the original entrepreneur," Pilnick said, pointing to the company's history of innovation. Kellogg was the first to market breakfast cereals by putting prizes inside cereal boxes, and his well-known signature is found on Kellogg's products and the WK Kellogg Co logo today.
While WK Kellogg Co's branding pays homage to the history, there are opportunities to modernize the business to fit the wants of today's consumers. And the company is looking at two time horizons to achieve that.
Kellogg plans to optimize its cereal business by moving five businesses under one umbrella in order to streamline operations. The businesses — tied to US retail, Canada, the Caribbean, food away from home, and Kashi and Bear Naked — previously operated separately.
"Think about just the power of one business, harmonizing different things that are different across that business but also scaling up big ideas," Pilnick added. "That was almost impossible before."
In the first three years, the company also aims to improve efficiency by investing $450 million to $500 million to update the company's supply chain and bring a "meaningful amount of profit and cash" for stakeholders.
"We can take a business that we believe will have a 9% EBITDA margin at the end of 2023 and drive it an additional 500 basis points over the next three years," he said.
That said, the company also continues to move past a nearly three-month-long strike among its factory workers in 2021 and a plant fire that same year at its Memphis location. Its five-year contract with union members is set to expire in 2026.
Following that, the company plans to look "beyond cereal," Pilnick said, with potential mergers and acquisitions on the table. "We believe we'll be able to find M&A targets where we would be the natural parent," Pilnick added.
But Wall Street isn't yet sold on that strategy.
Morningstar analyst Erin Lash wrote that the business shouldn't be so quick to jump into other categories considering its stated need to focus on cereal.
"The firm’s aims to buoy its lackluster growth prospects through strategic tie-ups outside cereal in the medium to long term strikes us as perplexing, given this action runs counter to the stated benefits (enhanced focus on cereal) of the split with Kellogg’s global snacking business (now named Kellanova)," Lash wrote in a note to clients. "We think such a move could prove value destructive if it extends the firm beyond its core competencies."
Since the spin-off was completed on Monday, WK Kellogg Co stock is down over 23% while Kellanova has fallen 3.5%. Just four analysts have initiated coverage of WK Kellogg so far.
Goldman Sachs initiated coverage with a Sell rating, citing potential hurdles in the near term.
"We see near-term margin expansion potential on favorable input costs," the analysts wrote. "We believe productivity programs are likely to be back-end weighted in FY26 and partially predicated on a manufacturing network rationalization that is currently impeded by the plant closure moratorium that it entered into with its unions in late 2021; this expires in 2026 when the contract is once again subject to renewal."
As for the market's reception so far, Pilnick is looking the other way.
"We don't run our business day to day watching the stock market," Pilnick said. "There's a unique opportunity here."
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].
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