On Jan 23, we issued an updated research report on General Mills, Inc. (GIS).
On Dec 17, General Mills announced second-quarter fiscal 2015 results. Adjusted earnings of 80 cents per share beat the Zacks Consensus Estimate of 7 cents as well as management’s expectations due to a shift in timing of expenses.
Earnings, however, declined around 4% year over year as sales and margins remained weak. Revenues missed the consensus mark and declined 3% year over year as the company continues to battle weak demand in the U.S. and slowdown in some of the international markets. Encouragingly, however, margins improved sequentially in the quarter despite year-over-year decline.
Sales and profits in General Mills’ U.S. Retail segment were below expectations in the first half of fiscal 2015 as a result of weak food industry trends. The company’s core cereals business continues to underperform due to weak category growth. Lower demand for cereals due to competitive pressures from alternatives including yogurt, eggs, bread and peanut butter are hurting category growth. Some international markets, especially the emerging countries, are also experiencing a slowdown. Moreover, though the yogurt business did show some improvement in the first half of fiscal 2015 after declining in fiscal 2013 and 2014, it remains to be seen if it can be sustained.
Second-half results are expected to be better than the first as management expects sales and profits in the U.S. Retail segment to improve. Management aims to improve the segment’s performance in the second half through new products, renovation of existing brands and better execution of marketing and customer programs. Management’s priorities for the second half include increased investments in cereal to foster growth, turning the U.S. yogurt business around and driving profits at the better-for-you snacks business.
Moreover, easy comparison with the year-ago period, incremental cost savings and decline in commodity costs should lead to better profits in second half. Milk costs have declined after the third quarter. Other than that, incremental sales from the Annie’s acquisition should add to the top line.
General Mills acquired natural foods company Annie’s, Inc. in October last year that is expected to strengthen its foothold in the organic and natural foods market where sales have been growing at a 12% compounded rate over the last 10 years. The Annie's acquisition is expected to add roughly $120 million to net sales and 1 cent of earnings per share in fiscal 2015.
Second-half net sales are expected to grow at a mid single-digit rate in constant currency. Constant currency adjusted operating profit is expected to grow at a high single-digit rate. Constant currency adjusted earnings per share for the second half are expected to grow at a double-digit rate.
Also, the company enjoys sound fundamentals — strong market share position in some leading food categories and growing international presence — which keeps our faith in the stock.
Some other food companies which are struggling with their top line include Mondelez International, Inc. (MDLZ), Kraft Foods Group, Inc. (KRFT) and Kellogg Company (K).
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