GIS 3Q Earnings Beat, Margins Down
General Mills’ (GIS) third-quarter fiscal 2013 adjusted earnings rose 16.4% year on year to 64 cents per share. The quarterly earnings beat the Zacks Consensus Estimate of 57 cents by 12.3%. The upside was driven by the recent acquisitions, strong sales and profits in the U.S. retail business and lower advertising costs.
Earnings excluded the impact of mark-to-market effects, restructuring and acquisition integration costs.
Though the company delivered decent revenue growth, margins were quite weak in the quarter. Moreover, though General Mills upped its fiscal-2013 earnings expectations by a penny, the fourth quarter earnings outlook was weak as costs are apprehended to rise.
Revenues and Margins
Total revenue of the global consumer food company increased 8% year over year to $4.43 billion. Revenues mostly benefited from recent acquisitions, mainly the purchases of Brazilian food maker, Yoki Alimentos (in August this year) and Yoplait Canada. Sales were up 2%, excluding the impact of the acquisitions.
Price/mix pulled down revenues by 1 percentage points, while volume contributed 9 percentage points. Most of the volume growth was driven by acquisitions, excluding which organic volume growth would have been up 1%, better than last quarter’s flat growth. Foreign exchange had a neutral impact on revenues same as that of the second quarter. Revenues slivered past the Zacks Consensus Estimate of $4.36 billion.
Adjusted gross margin for the maker of Cheerios cereals and Betty Crocker dinner mixes declined 60 basis points (bps) to 34.9% due to higher input costs. Adjusted operating margin was flat at 15.2% in the quarter despite low advertising costs. Lower gross margins, increased marketing spending to support in-store merchandising and Venezuelan currency devaluation proved to be the headwinds for operating margins in the quarter.
This is the first sequential decline in GIS’ margins so far in fiscal 2013. General Mills’ margins had improved sequentially in the first two quarters of fiscal 2013.
Segment Performance
U.S. Retail: Revenues from the U.S. Retail segment improved 2.1% year over year to $2.66 billion in the quarter driven largely by price/mix gains. Both new products as well as established brands contributed to revenue growth.
Sales growth in the Snacks, Meals, Baking Products and Small Planet Foods divisions was offset by declines in the Big G cereals and Yoplait yogurt businesses. The Frozen Foods business saw flat year-over-year growth in the quarter. Segment operating profit rose 12.6% to $577.3 million due to lower advertising costs.
General Mills’ Yoplait yogurt business is presently struggling as increased sales prices in response to dairy cost inflation is reducing the competitiveness of its products. In the quarter, the Yoplait business declined 4%. The company plans to take steps to re-invigorate its yogurt business in the U.S. in fiscal 2013 through innovation and increased promotional support for new products.
International: Revenues in the International segment grew 24% year over year to $1.30 billion benefitting largely from acquisitions. Volume added 33 percentage points, mostly from the acquisitions of Yoki and Yoplait Canada, while price/mix took away 8 percentage points from net sales growth.
Foreign exchange had an unfavorable 1 percentage point impact on net sales. In constant currency, International revenues increased 25%.
Constant currency revenue grew 186% in Latin America due to the addition of Yoki. Constant currency revenue grew 21% in Canada, gaining from the addition of Yoplait Canada. Constant currency revenue elevated 1% in Europe and 16% in Asia Pacific. Segment operating profit was almost flat at $96.1 million, primarily due to headwinds from foreign exchange including the Venezuelan currency devaluation.
Bakeries and Foodservice: On a year-over-year basis, the Bakeries and Foodservice segment’s quarterly revenue was flat to $469.9 million. Volume decline of 1 percentage points was offset by a similar tailwind from price mix. However, segment operating profit improved 13.4% year over year to $75.4 million, driven by lower manufacturing costs and a better mix.
Outlook for 2013 and Fourth Quarter of 2013
General Mills expects fourth-quarter earnings to decline from the year-ago levels due to higher supply chain costs and increased spending to support in-store merchandising. However, management upped its fiscal-2013 adjusted earnings guidance slightly to a range of $2.66–$2.68 from prior expectations in the range of $2.65–$2.67. Commodity inflation is maintained at 3% in fiscal 2013.
For fiscal 2014, GIS expects high single-digit earnings growth, in line with the long-term targets.
Other Stocks to Consider
General Mills currently carries a Zacks Rank #3 (Hold). Other stocks in the food industry that are currently performing well and have a bright outlook include J&J Snack Foods Corp. (JJSF) – Zacks Rank #1 (Strong Buy) and ConAgra Foods, Inc. (CAG) and Kellogg Company (K) – Zacks Rank #2 (Buy).
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Read the Full Research Report on CAG
Read the Full Research Report on K
Read the Full Research Report on JJSF
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