On Jan 23, we issued an updated research report on
General Mills, Inc.
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
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
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. (
), Kraft Foods Group, Inc. (
) and Kellogg Company (
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