We issued an updated research report on General Mills, Inc. GIS, a leading global manufacturer and marketer of branded consumer foods, on Dec 21, 2015.
On Dec 17, General Mills reported soft second-quarter fiscal 2016 results, missing the Zacks Consensus Estimate for sales and only managing to match the same for earnings. Re-structuring cost savings and lower advertising spend made up for the slump in revenues to result in a 5% earnings growth to 82 cents per share. Lower taxes, interest expenses as well as share count also supported earnings.
However, sales dipped 2% on a constant currency basis due to weak U.S. Retail sales. After increasing in the first quarter, revenues from this segment dropped 3.5% year over year in the second due to lower volumes, currency headwinds and divestiture of the North American Green Giant business. In November, General Mills divested the Green Giant and Le Sueur brands of frozen and shelf-stable vegetables to food manufacturer, B&G Foods, Inc. BGS, in a cash transaction worth $823 million.
Moreover, the Zacks Rank #4 (Sell) company lowered the previously issued sales and earnings outlook for fiscal 2016 to account for the Green Giant divesture.
Sales and profits at General Mills’ U.S. Retail segment, contributing 60% to sales, have been soft due to the changing consumer food preferences. General Mills, like many other U.S. food producers, such as Kellogg Company K and Mondelez International, Inc. MDLZ, has been struggling due to the shift in consumers’ preference toward natural and organic food.
Management is trying to turn around this business through increased investment in cereals to foster growth, accelerate the performance of better-for-you snacking — both yogurt and snacks businesses — and drive double-digit growth in the natural and organic portfolio. The company is also investing in consumer focused innovation and marketing as well as accelerating the natural and organic product portfolio to boost growth.
General Mills’ core cereals business has not been doing well over the past few quarters due to weak category growth. Lower demand for cereals due to competitive pressures from alternatives like yogurt, eggs, bread and peanut butter are hurting category growth. Though category sales declines have moderated over the past few quarters, General Mills’ retail sales performance could not keep pace with the category trends. General Mills is working to improve cereals performance through new products, renovation of existing brands and better execution of marketing and customer programs.
Though management’s innovation, renovation and marketing initiatives led to slightly better returns in snacks and cereals categories, these were offset by lower merchandising levels in the first half.
In Yoghurt, lower dairy prices this year were offset by intensified competitive activity which hurt first-half sales.
In the second half, management has plans to increase media investments and merchandising activity, supported by the cost savings, which could improve results.
General Mills is also undertaking several multi-year restructuring initiatives to improve operational efficiency to generate cost savings and support key growth strategies. The company increased the cost-savings target to $450 million by fiscal 2017 from $400 million and established a $500 million savings target to be achieved by fiscal 2018 in view of the incremental savings from Project Century.
These significant restructuring savings can lead to steady bottom-line performance in fiscal 2016.
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