General Mills, Inc. (NYSE: GIS) reported on its fiscal fourth quarter of 2018 on June 27. The consumer packaged goods (CPG) giant believes it's made progress in breathing some life into the growth of its once-tired brand portfolios, and during the company's earnings conference call , management was eager to discuss a turnaround in snack and breakfast categories. Below, we'll review and analyze comments regarding sales, as well as management's perspective on e-commerce, acquisitions, and rising costs in fiscal 2019.
1. Successfully tackling sales weaknesses
Organic net sales increased 1%, driven by a positive net price realization and mix across all four segments. We saw particularly good net sales performance on our "Accelerate" platforms, including snack bars, Haagen-Dazs, and Old El Paso. Importantly, we gained share again in U.S. cereal in the quarter, despite a double-digit reduction in merchandising. And we grew our U.S. yogurt market share in the quarter for the first time in three years. --CEO Jeff Harmening
General Mills' North America retail segment is the company's largest business division by far. At $10.1 billion in sales in fiscal 2018, North America represented nearly two-thirds of total company revenue, and its $2.2 billion in operating profit accounted for almost 80% of the organization's operating profit before corporate overhead and restructuring expenses. A revival in slumping categories in North America, particularly yogurt, helped North America post flat year-over-year sales in the fourth quarter of $2.4 billion, continuing a relatively positive trend of 1% revenue growth in the third quarter of 2018.
During the conference call, management observed that product innovation is largely responsible for new market-share growth. The introduction of Yoplait "Oui" and "Mix-Ins" in the yogurt category, coupled with successful cereal launches including a new unicorn marshmallow in Lucky Charms, have captured consumer enthusiasm. These and other product evolutions are pushing back on a belief held by some investors that General Mills' market-share losses to younger, smaller brands is inevitable. However, the company will need to capture additional market share in 2019 before shareholders reward its stock significantly.
2. E-commerce capturing high-quality growth
Our "full basket" market shares online continue to over-index relative to the fiscal stores in both the U.S. and Europe, and General Mills is seen as the key strategic partner for our e-commerce retail customers, bringing differential insights and solutions to drive growth. --CEO Jeff Harmening
While General Mills doesn't break down actual dollar volumes of e-commerce sales, the company did disclose in the fourth-quarter call that e-commerce sales jumped 50% in fiscal 2017, which includes a 70% leap in North America. The quote above hints that as some sales shift from brick-and-mortar shopping experiences to purely online ordering and delivery, a traditional grocery and convenience channel player like General Mills won't necessarily lose out.
Harmening explains that purchases online are currently "over-indexing" their in-store purchase counterparts by 20%. This means that in the company's rapidly expanding e-commerce channel, consumers are spending more per online basket of goods versus in-store purchases. This opens the possibility that e-commerce could potentially be a driver of top-line growth, rather than a mere supplement to physical-store sales.
Image source: General Mills, Inc.
3. A transition-year focus on Blue Buffalo
The transaction closed on April 24 and we are moving full steam ahead, with our transition plans working to bring General Mills expertise to bear where it's needed and ensuring we stay out of their way when it is not. --CEO Jeff Harmening
General Mills' $8 billion purchase of pet-food manufacturer Blue Buffalo represents a creative extension into nontraditional categories for the packaged foods giant. As I discussed recently with my colleague Vincent Shen , Blue Buffalo is the leading provider in the "wholesome natural" pet-food category. Blue Buffalo has improved its top line at a compounded annual growth rate (CAGR) of roughly 12% in the last three years.
Blue Buffalo's results weren't incorporated into the fourth quarter since the deal closed after the period ended. During the earnings conference call, Harmening relayed that Blue Buffalo has continued its strong growth year to date through April. He cited double-digit growth catalyzed by "aggressive" e-commerce improvement and expansion into the food, drug, and mass (FDM) channel.
Importantly, in the excerpt above, General Mills' CEO reiterates the promise that the company will allow Blue Buffalo co-founder Billy Bishop and his team to continue to run the pet operation unhindered. General Mills is providing support in the way of logistics personnel, as well as brute resources: Blue Buffalo has launched a new pet-treats facility in Joplin, Missouri, and will bring a new factory in Richmond, Indiana online this summer. While the Blue Buffalo purchase won't be accretive (additive) to earnings until 2020, it's projected to immediately impact earnings, adding 9 to 10 percentage points to company sales in fiscal 2019.
4. Managing cost inflation
We expect input cost inflation to be approximately 5%, 1 point higher than fiscal '18 levels. We are roughly 40% covered on our global commodity positions at this point in the year. We are targeting cost of goods sold, HMM [see below] savings of approximately $450 million, which is ahead of year-ago levels driven by a full-year benefit from our global sourcing initiatives. --CFO Don Mulligan
"HMM" is General Mills' moniker for its cost-savings program, known more formally as Holistic Margin Management. In fiscal 2018, the company reached its goal of realizing $700 million in annual savings from HMM against a fiscal-year-2015 base. The new target represents an acceleration in the pace in productivity gains, but management clearly feels the need to respond to external margin pressures. These include rising commodity and freight transportation costs, two items which have impacted the entire CPG industry in recent quarters.
General Mills' ability to control costs compensated for soft revenue during the 2018 fiscal year. Despite a revenue decline of nearly 6% to $15.7 billion, operating margin dipped only 50 basis points, to 15.9%. The organization will rely on its ability to squeeze more out of HMM in 2019 -- management's guidance calls for a full-year 2019 increase in operating profit of between 6% and 9%, against an adjusted base of $2.7 billion in 2018.
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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .