General Mills Inc.’s (GIS) fiscal 2014 woes seem to be continuing in fiscal 2015.
The company missed the Zacks Consensus Estimate for both earnings and revenues in the first quarter of fiscal 2015 as sales and profit continued to decline in the U.S.
Shares of the packaged consumer goods giant declined more than 3% in pre-market trading. In fact, General Mills has missed the Zacks Consensus Estimate for both earnings and revenues for four quarters in a row now. The company’s share price has dipped more than 10% year-to-date.
First-Quarter Earnings
First-quarter adjusted earnings per share of 61 cents missed the Zacks Consensus Estimate of 68 cents by 10.3%. As expected, earnings also declined 13% year over year due to weak sales and poor margins.
The maker of Cheerios cereal and Betty Crocker cake mixes incurred significantly higher merchandising costs in the quarter as it launched more than 250 new products in the U.S. Retail business, which took a toll on profits.
Adjusted earnings exclude restructuring costs and mark-to-market losses.
Weak Revenues and Margins
Total revenue of the global consumer food company declined 2% year over year to $4.27 billion and missed the Zacks Consensus Estimate of $4.42 billion by 3.4% as U.S sales continued to lag.
Price/mix added 1% to revenues, same as the last four quarters. Volumes declined 2%, flat with the last quarter. Foreign exchange dragged revenues by 1%.
Adjusted gross margin declined 210 basis points (bps) to 34.8% due to lower sales and unfavorable product mix.
Adjusted operating margin declined 240 bps to 14.5% in the quarter due to weak gross margins and higher advertising costs. Advertising costs rose 1% in the quarter to support the large number of launches in the U.S. Retail business.
Segment Performance
U.S. Retail: Revenues from the U.S. Retail segment declined 5.4% year over year to $2.44 billion in the quarter due to decline in both price/mix and volumes. Price/mix declined 3% as higher merchandising expenses were passed on. Volumes declined 2% in the quarter as a result of weak food industry trends.
Sales growth in the Snacks, Yoplait and Small Planet Foods divisions was offset by declines in the Big G cereal, Baking Products and Meals segment.
The only positive factor in an otherwise forgettable quarter was Yoplait yogurt business’ return to positive growth backed by volume growth and market share gains after witnessing sales decline in both fiscal 2014 and 2015.
The core cereals business has also been soft due to weak category growth resulting from insufficient advertising by the cereal companies. Lower demand for cereals due to competitive pressures from alternatives including yogurt, eggs, bread and peanut butter are hurting category growth.
Segment operating profit declined 25.3% to $457.2 million due to weak revenues and higher merchandising costs.
International: Revenues in the International segment grew 2.3% year over year to $1.35 billion due to price/mix gains. On a constant currency basis, international sales rose 6% driven largely by growth in Latin America and Europe.
While price/mix added 7% to net sales growth, volumes declined 1%. Foreign exchange had an unfavorable impact of 4% on net sales.
Constant currency sales grew 20% in Latin America, 4% in Asia-Pacific and 4% in Europe. However, sales declined 4% in Canada due to divestures of some businesses.
Segment operating profit grew 17% on a constant currency basis to $146 million due to price/mix gains which made up for higher input costs and advertising expenses.
Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment’s quarterly revenues improved 1.1% to $473.0 million led by yogurt, frozen breakfast and snacks. Volumes declined 1% while price/mix increased 2%. Segment operating profit rose 18% year over year to $87 million.
Fiscal 2015 Outlook Retained
Management retained its previously provided outlook for fiscal 2015, while pointing out that operating condition in the U.S. markets is becoming more challenging.
Management's prime objective in fiscal 2015 is to accelerate top-line growth in the rest of the year through strong innovation, renovation of existing brands and aggressive consumer oriented marketing initiatives.
Fiscal 2015 net sales are expected to increase at a mid single-digit rate in constant currency (including the impact of the 53rd week).
In June, General Mills announced that it expects to generate at least $400 million of supply chain savings under its Holistic Margin Management (HMM) program. In addition, the company talked about undertaking several “new cost-reduction initiatives” including streamlining the North American manufacturing and distribution operations and possible reduction in capacity and overhead costs.
These initiatives are expected to result in $40 million pre-tax savings in fiscal 2015 with additional savings expected in fiscal 2016. Concurrent with the first-quarter press release, General Mills stated that this initiative is expected to generate $100 million in annualized savings by fiscal 2017.
These savings are expected to lead to a mid-single-digit growth in adjusted operating profit (constant currency). Adjusted earnings per share (constant currency) are expected to grow at a high-single-digit rate. Currency headwinds are expected to hurt earnings per share by 2% in fiscal 2015, lower than the prior expectation of 3%.
Earlier this month, the Zacks Rank #3 (Hold) company announced a definitive deal to buy natural foods maker Annie’s Inc. (BNNY) for $820 million.
The deal is expected to strengthen General Mills’ foothold in the organic and natural foods market where sales have been growing at a 12% compounded rate over the last 10 years.
Other Stocks to Consider
Better-ranked food stocks include J&J Snack Foods Corp. (JJSF) and The Hain Celestial Group, Inc. (HAIN). Both these stocks carry a Zacks Rank #2 (Buy).
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