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The food business is more competitive than ever, and General Mills, Inc. (NYSE: GIS) has felt the squeeze from a variety of sources. It wasn't prepared for the wave of natural and organic products hitting the market; it's facing competition from smaller, more nimble companies; and expenses like rising fuel costs are hurting its bottom line.
In the fourth quarter of fiscal 2018, the company showed that it's starting to see benefits from strategic changes it's made over the last few years. Revenue was up 2% to $3.9 billion, and segment operating profit was up 8% as its U.S. business began to rebound. If the trends continue, this stock could be a great value for long-term investors.
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Where General Mills is seeing growth
The fourth quarter continued some general trends we've seen from General Mills over the past year. Retail sales are declining slightly, while the convenience store and foodservice segment is demonstrating consistent growth. What was new in both segments last quarter was a jump in operating income.
| Segment | Q4 2018 Revenue | Q4 2018 Operating Income |
| North American Retail | $2.39 billion (0.2%) | $543.0 million 7% |
| Convenience Stores & Foodservice | $510.6 million 4.7% | $105.8 million 10.6% |
| Europe & Australia | $556.2 million 14.3% | $37.0 million 54.9% |
| Asia & Latin America | $435.4 million (1.1%) | $22.3 million (57.4%) |
Data source: General Mills Q4 2018 earnings report.
Management said that operating income growth in the U.S. business was driven by higher sale prices, lower operating costs due to previously announced layoffs, and lower raw material costs. The price increases in particular are important for General Mills, as they enable it to pass added costs on to customers.
International markets, meanwhile, were affected by currency changes. On a constant-currency basis, Europe & Australia organic net sales were up 4% and operating profit was up 37%. In Asia & Latin America, organic sales were flat and constant-currency operating profit was down 56% as volumes declined and higher input costs hurt margins.
Pet food isn't a growth business for General Mills yet
What we're not seeing in the results above is the impact of the $8.0 billion acquisition of Blue Buffalo Pet Products, which closed in April. This division will expand the company's market beyond human food to pet foods, which is one of the few food businesses that's growing rapidly today.
The logic behind the acquisition is that pet food will help General Mills' overall growth, and the company can leverage its scale to lower costs and expand distribution of Blue Buffalo's products.