General Mills Beats Q3 Earnings, Annie's Boosts Sales (Revised) - Analyst Blog
General Mills Inc. GIS performed better in the third quarter of fiscal 2015 from a much weaker first half. Moreover, the global consumer food company stated that it plans to complete the previously announced job cuts before the fiscal year ends in May 2015. Shares rose around 1.5% on Wednesday.
Third-Quarter Earnings
Third-quarter adjusted earnings per share of 70 cents beat the Zacks Consensus Estimate of 67 cents by 4.5%.
Earnings increased 13% year over year as higher pricing, gains from acquisitions and lower advertising costs made up for the currency headwinds. On a constant currency basis, earnings were up 15%. We believe that a lower tax rate and easy comparison with the year-ago period also played an important role in improving the operating results.
Adjusted earnings exclude restructuring and acquisition integration costs, impact of Venezuela currency devaluation as well as mark-to-market valuation effects.
Revenues and Margins Improve
Total revenue declined 1% year over year to $4.35 billion due to currency headwinds. The top line missed the Zacks Consensus Estimate of $4.40 billion by 1.1%. Foreign exchange headwinds dragged revenues by 4%.
In constant currency terms, sales grew 3% helped by incremental sales from the Oct 2014 buyout of natural foods company, Annie’s Inc. The Annie’s acquisition added 1% to sales growth. Moreover, pricing gains and improved volumes aided revenues.
Price/mix added 4% to revenues, much higher than 1% in the last five quarters. Volumes declined 1%, better than 2% drop in the previous two quarters.
Adjusted gross margin declined 90 basis points (bps) to 33.2% due to unfavorable product mix.
Advertising costs declined 8%. Adjusted operating margin improved 50 bps to 15.3% as gross margin weakness was offset by lower advertising costs and cost savings from restructuring plans.
Segment Performance
U.S. Retail: Revenues from the U.S. Retail segment increased 1% year over year to $2.65 billion as price/mix gains made up for volume declines. Price/mix increased 3%, while volumes declined 2% as a result of weak food industry trends. The Annie’s acquisition added 2% to segment sales growth and 1% to volumes.
Sales growth in the Snacks and Yogurt divisions was offset by declines in the Baking Products and Meals segments. The Big G cereal business remained flat with the last year.
General Mills’ Yoplait yogurt business has performed well so far in fiscal 2015 driven by volume growth and market share gains after witnessing sales decline in both fiscal 2013 and 2014.
Sales and profits in the U.S. Retail segment were below expectations in the first half of 2015 due to weak food industry trends. General Mills’ core cereals business is underperforming 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.
Management aims to improve the segment’s performance through new products, renovation of existing brands and better execution of marketing and customer programs.
Management’s priorities for the second half included increased investments in cereal to foster growth, turning the U.S. yogurt business around and driving profits at the better-for-you snacks business. The better results in the reported quarter indicate that these efforts may have started to yield the desired results.
Segment operating profit grew 1% to $521 million.
International: Revenues in the International segment declined 6.7% year over year to $1.23 billion because of currency headwinds. Foreign exchange had an unfavorable impact of 13% on net sales.
On a constant currency basis, international sales rose 6% driven largely by price/mix gains.
While price/mix added 6% to net sales growth, volumes remained flat.
Constant currency sales grew 20% in Latin America, 4% each in Asia-Pacific and Canada and 3% in Europe.
Segment operating profit improved 10% on a constant currency basis to $108 million.
Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment’s revenues improved 6.6% to $465.1 million led by yogurt, frozen breakfast and cereals. Volumes declined 1%, while price/mix increased 7%. Segment operating profit rose 11% year over year to $69 million.
Fiscal 2015 Outlook Retained
Management retained the previously provided fiscal 2015 outlook. Moreover, it pointed out that fourth-quarter earnings growth will be strong on the back of gains from the Annie’s acquisitions and the one extra week in the period.
Fiscal 2015 net sales are expected to increase at a low single-digit rate in constant currency, including the impact of the 53rd week and incremental sales from Annie’s. The 53rd week is expected to add 2% to sales growth, while the Annie’s acquisition is expected to add $120 million to incremental sales
Adjusted operating profit (constant currency) is expected to decline at a low single-digit rate.
Adjusted earnings per share (constant currency) are expected to grow at a low single-digit rate. Currency headwinds are expected to hurt earnings by 7 cent, higher than 5 cents expected previously.
Restructuring Plans
Last year, General Mills announced its decision to cut 700-800 jobs in the U.S. as part of the restructuring plan, Project Catalyst. Concurrent with the fiscal third-quarter results, the company said it plans to eliminate up to 800 jobs before the end of fiscal 2015 in May. Under Project Catalyst, which is largely complete, the company made efforts to increase organizational effectiveness and reduce overhead expenses.
In addition, the company is carrying out another restructuring program — Project Century — which includes streamlining of the North American manufacturing and distribution operations targeting possible reduction in capacity and overhead costs. The Holistic Margin Management (HMM) program is also in place which has already delivered $2.0 billion in cost savings over the past five years and is expected to generate total productivity savings of $4 billion by 2020.
Stocks to Consider
General Mills carries a Zacks Rank #3 (Hold). Better-ranked stocks in the food sector include Flowers Foods, Inc. FLO, SUPERVALU Inc. SVU and Premier Foods plc PRRFY. All the three stocks carry a Zacks Rank #2 (Buy).
(We have revised this article to correct a mistake. The previous version, published on March 18, should not be relied upon.)
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