General Mills Inc. GIS reported soft second-quarter fiscal 2016 results, missing the Zacks Consensus Estimate for sales and only managing to deliver in-line earnings.
Moreover, the company lowered the previously issued sales and earnings outlook for fiscal 2016 to account for the Green Giant business divesture. Shares declined 1.8% in pre-market trading.
General Mills divested its Green Giant and Le Sueur brands of frozen and shelf-stable vegetables to food manufacturer, B&G Foods, Inc. BGS, in November.
Earnings Discussion
Second-quarter adjusted earnings per share of 82 cents were in line with the Zacks Consensus Estimate but rose 2% year over year. A stronger U.S. dollar hurt earnings by 6%. On a constant currency basis, earnings improved 5%.
Cost savings from restructuring activities and lower advertising costs offset the slump in revenues to result in a positive EPS growth for the maker of Betty Crocker cake mixes and Progresso soups.
Adjusted earnings exclude mark-to-market valuation effects, restructuring and project-related charges and a divesture gain. Including these items, reported earnings were 87 cents per share, a 55% year-over-year jump.
General Mills is currently pursuing several multi-year restructuring initiatives including job cuts and factory closings to generate cost savings and support key growth strategies. The company expects to record cost savings of $450 million by fiscal 2017 (previously $400 million) and $500 million by fiscal 2015.
Revenues and Margins
Total revenue declined 6% year over year to $4.42 billion due to lower volumes, currency headwinds and brand divestures. The top line missed the Zacks Consensus Estimate of $4.58 billion by 3.3%. Foreign exchange headwinds dragged revenues by 4%.
In constant currency terms, sales declined 2% as a decent international performance offset the weak sales result in the core U.S. retail segment.
Price/mix added 1% to revenues, less than 2% in the previous quarter. Volumes declined 3%, lower than 2% growth in the previous quarter. The net impact of acquisitions (Oct 2014 buyout of Annie’s Inc.) and divestures (Green Giant) hurt sales by 1%.
Adjusted gross margin expanded 60 basis points (bps) to 35.5% backed by higher pricing and savings from cost reduction activities.
Selling, general and administrative expenses declined 9% on the back of lower advertising costs and savings from restructuring programs, like Project Catalyst. Advertising and media costs decreased 15%.
Adjusted operating profit was almost flat at $798.2 million as increase in international segment was offset by a decline in U.S. Retail profits. Adjusted operating margin improved 100 bps to 18% helped by higher gross margins, lower advertising costs and cost savings from restructuring plans. Notably, both gross and operating margins declined sequentially.
The adjusted effective tax rate was 32.3%, lower than 33.5% a year ago.
Segment Performance
U.S. Retail: Revenues from the U.S. Retail segment declined 3.5% year over year to $2.76 billion due to lower volumes. The net impact of acquisitions and divestures hurt sales by 1%. Sales declined across all the operating units. While Cereal, Meals and Yogurt recorded mid single-digit declines, Snacks and Baking Products businesses saw their sales dip 1%.
Segment operating profit decreased 2.5% to $600.4 million due to lower sales which offset gains from lower advertising costs and cost savings from re-structuring activities.
Sales and profits in the U.S. Retail segment, contributing 60% to its sales, declined in fiscal 2015 due to weak food industry trends amid changing consumer preferences. General Mills, like many other U.S. food producers like Kellogg Company K and Mondelez International, Inc. MDLZ, has been struggling due to the shift in consumer’s 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, such as yogurt, eggs, bread and peanut butter, is hurting category growth. The category sales declines have moderated over the past few quarters. The company is also working to improve cereals performance through new products, renovation of existing brands and better execution of marketing and customer programs.
International: Revenues in the International segment declined 12.4% year over year to $1.16 billion because of currency headwinds. Foreign exchange had a 15% unfavorable impact on net sales.
On a constant currency basis, international sales rose 3% as improvement in Latin America (17%), Canada (3%) and Asia-Pacific (2%) made up for the 2% decline in Europe.
While price/mix added 5% to net sales growth, volumes declined 2%.
Segment operating profit grew 19% on a constant currency basis to $136 million supported by higher pricing and lower input costs.
Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment’s revenues declined 4.5% to $505.8 million due to lower volumes and unfavorable price/mix. Segment operating profit increased 7% year over year to $102 million driven by cost saving initiatives.
Fiscal 2016 Outlook Down
General Mills lowered the previously issued fiscal 2016 guidance to reflect the impact of the Green Giant divesture. The divesture is expected to reduce fiscal 2016 net sales growth and total segment operating profit growth by approximately 2% each, and dilute fiscal 2016 earnings per share by roughly 7 cents, excluding the gain from sale.
Fiscal 2016 net sales (on a constant currency basis) are expected to decline in a low single-digit rate as against being flat year over year. The fiscal 2015 results included the impact of a 53rd week.
Adjusted earnings per share (constant currency) are expected to grow at a low single-digit rate compared with the mid single-digit rate projected previously. Currency headwinds are expected to hurt earnings by 9 cents, as projected previously.
General Mills carries a Zacks Rank #3 (Hold).
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