General Mills’ (GIS) second quarter fiscal 2013 adjusted earnings rose 13% year on year to 86 cents per share. The quarterly earnings handsomely beat the Zacks Consensus Estimate of 79 cents. The upside was driven by recent acquisitions, better-than-expected sales and profits in the U.S. retail business and solid overall margin expansion.
The earnings excluded the impact of mark-to-market effects. The company also delivered solid revenue growth and upped its full year earnings outlook.
Revenues and Margins
Total revenue of the global consumer food company increased 6% year over year to $4.88 billion. Revenues mostly benefitted from recent acquisitions, mainly the purchases of Brazilian food maker Yoki Alimentos (in August this year) and Yoplait Canada. Sales were up 2% excluding the impact of acquisitions.
Price/mix pulled down revenues by 1 percentage points, while volume contributed 7 percentage points. Most of the volume growth was driven by acquisitions. Foreign exchange had a neutral impact on revenues. Revenues slivered past the Zacks Consensus Estimate of $4.87 billion.
Adjusted gross margin for the maker of Cheerios cereals and Betty Crocker dinner mixes improved 20 basis points (bps) to 36.7% driven by the solid sales growth. Adjusted operating margin improved 50 bps to 18.1% in the quarter. Higher gross margin, lower selling, general and administrative (SG&A) costs, and lower advertising expenses led to the better operating margin in the quarter.
We note that General Mills’ margins have improved sequentially in both the quarters of fiscal 2013.
Segment Performance
U.S. Retail: Revenues from the U.S. Retail segment improved 2% year over year to $2.98 billion in the quarter driven largely by volume growth. Sales growth in the Snacks, Meals and Small Planet Foods divisions was offset by declines in the Big G cereals, Baking Products and Yoplait yogurt businesses.
The Frozen Foods business saw flat year-over-year growth in the quarter. General Mills’ Yoplait yogurt business is presently struggling as increased sales prices in response to dairy cost inflation is reducing the competitiveness of its products.
The company plans to take steps to re-invigorate its yogurt business in the U.S. in fiscal 2013 through innovation and increased promotional support for new products. Segment operating profit rose 9.3% to $723 million despite lower advertising costs.
International: Revenues in the International segment grew 19% year over year to $1.38 billion. Volume added 26 percentage points, mostly from acquisitions of Yoki and Yoplait Canada, while price/mix took away 4 percentage points from net sales growth.
Foreign exchange had an unfavorable 3 percentage point impact on net sales. In constant currency, International revenues increased 22%. Revenues doubled in Latin America due to the addition of Yoki, while it grew 16% in Canada, gaining from the addition of Yoplait Canada. In constant currency terms, revenue grew 3% in Europe and 8% in Asia Pacific. Segment operating profit was up 4.3% to $139.2 million.
Bakeries and Foodservice: On a year-over-year basis, the Bakeries and Foodservice segment’s quarterly revenue declined 1% to $516 million. Volume decline of 2 percentage points were offset by price mix gains of 1 percentage point. However, segment operating profit improved 24% year over year to $96 million driven by lower wheat costs and a better mix.
Improved Guidance
Management upped its fiscal 2013 adjusted earnings guidance to a range of $2.65-$2.67 from prior expectations of approximately $2.65 a share. Commodity inflation is expected to be at the higher end of its previously provided guidance range of 2% to 3% in fiscal 2013 due to higher commodity inflation rates in the second half. The tax rate is also expected to be higher in the second half.
Our Recommendation
We currently have a Neutral recommendation on General Mills. The stock carries a Zacks #2 Rank (a short-term Buy rating), reflecting the better sales and profit trends seen in the first half of 2013 as compared to fiscal 2012. Peer Kellogg Company (K) also carries a Zacks #2 Rank.
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