General Mills Q4 Earnings Top, Sales Lag; Margins Improve - Analyst Blog
Zacks Equity Research
Updated
General Mills Inc.GIS performed almost in line with expectations in the fourth quarter of fiscal 2015. An extra week in the quarter and better margins offset a relatively softer top-line performance amid changing consumer preference and unfavorable currency environment.
Fourth-Quarter Earnings
Fourth-quarter adjusted earnings per share of 75 cents beat the Zacks Consensus Estimate of 71 cents by 6%.
Earnings increased 12% year over year as an extra selling week, pricing gains, better gross margins and lower advertising costs made up for the currency headwinds.
Currency impact hurt earnings by 6% in the quarter. On a constant currency basis, earnings were up 18%, in line with management’s expectations of a double-digit growth range.
A lower tax rate and cost savings from restructuring activities also played an important role in improving the earnings results. The extra week added 4 cents to earnings per share.
Adjusted earnings exclude restructuring and project-related charges, acquisition integration costs, asset impairment costs, some tax adjustments as well as mark-to-market valuation effects.
General Mills Inc. - Earnings Surprise | FindTheBest
Revenues and Margins In Line with Expectations
Total revenue remained flat year over year at $4.3 billion due to currency headwinds. The top line missed the Zacks Consensus Estimate of $4.521 billion by 4%. Foreign exchange headwinds dragged revenues by 6%.
In constant currency terms, sales grew 6% helped by incremental sales from the Oct 2014 buyout of natural foods company, Annie’s Inc., and the extra week in the quarter. The extra week added 6% to sales growth. Moreover, pricing gains and improved volumes aided revenues.
The constant currency net sales growth, including the impact of the 53rd week and incremental sales from Annie’s, was in line with management’s expectation of a high single-digit rate.
Price/mix added 3% to revenues, less than 4% in the previous quarter. Volumes grew 3%, better than the declines seen in the previous two quarters gaining from the 53rd week and incremental contribution from Annie’s.
Adjusted gross margin rose 70 basis points (bps) to 35.3% due to higher pricing. Gross margins were better than management’s expectation of its being flat with the year-ago levels. Moreover, gross margin improved sequentially, as expected.
Advertising and media costs declined 6%. Adjusted operating margin improved 100 bps to 16.7% helped by strong gross margins, lower advertising costs and cost savings from restructuring plans.
The adjusted effective tax rate was 28.4%, less than 29.7% in the prior-year quarter.
Segment Performance
U.S. Retail: Revenues from the U.S. Retail segment increased 4.6% year over year to $2.55 billion helped by improved volumes and pricing gains. Price/mix increased 2% and volumes grew 3%.
Segment operating profit improved 13% to $565 million.
Sales and profits in the U.S. Retail segment declined in fiscal 2015 due to weak food industry trends amid changing consumer preferences. General Mills, like many other U.S. food producers, has been struggling due to shift in consumer’s preference toward natural and organic food.
Management is trying to turn around this business through increased investments in cereals to foster growth, turning the U.S. yogurt business around and driving profit at the better-for-you snacks business. The company will also invest in consumer focused innovation and marketing as well as accelerate the natural and organic product portfolio to drive growth in the segment.
General Mills’ core cereals business has not been doing too well over the past few quarters 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.
However, management is working to improve cereals’ performance through new products, renovation of existing brands and better execution of marketing and customer programs. In-fact, the company has committed to remove artificial flavors and colors from its entire cereals portfolio by 2017. At present 60% of its cereals are devoid of these ingredients.
However, its Yogurt business returned to growth in fiscal 2015 driven by volume growth and market share gains after witnessing sales decline in both fiscal 2013 and 2014. Core brand renovation, new products and marketing investments improved yogurt volumes in fiscal 2015.
International: Revenues in the International segment declined 8.8% year over year to $1.22 billion because of currency headwinds. Foreign exchange had an unfavorable impact of 18% on net sales.
On a constant currency basis, international sales rose 9% driven by price/mix gains and improved volumes.
While price/mix added 7% to net sales growth, volumes rose 2%.
Segment operating profit improved 12% on a constant currency basis to $134 million.
Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment’s revenues improved 3.9% to $527.5 million driven by higher volumes. Segment operating profit rose 17% year over year to $101 million gaining from higher volumes and favorable business mix.
Fiscal 2015 Results
Adjusted earnings per share of $2.86 in fiscal 2015 beat the Zacks Consensus Estimate of $2.83 by 1.1%. Earnings increased 1% year over year. On a constant currency basis, earnings increased 4%, in line with the guidance of a low single-digit rate.
Net sales declined 2% to $17.6 billion in fiscal 2015, missing the Zacks Consensus Estimate of $17.85 by 1.4%. On a constant currency basis, including the impact of the 53rd week and incremental sales from Annie’s, sales increased 1%, in line with management’s expectations of a low single-digit rate increase.
New Restructuring Plan
Last week, General Mills announced the elimination of 675 to 725 jobs at its international business under the new restructuring program, Project Compass. The company intends to generate savings of $45 million to $50 million annually from the plan with approximately $25 million to $30 million of cost savings to be realized in fiscal 2016. The process is expected to be completed by early fiscal 2017.
The company now anticipates that Project Compass and other ongoing cost-reduction plans will generate cost savings of $285 million to $310 million in fiscal 2016 and more than $400 million by fiscal 2017.
Fiscal 2016 Outlook
Fiscal 2016 net sales are expected to remain flat on a constant currency basis with the fiscal 2015 levels (including the impact of the 53rd week).
Adjusted operating profit (constant currency) is expected to increase at a low single-digit rate gaining from cost savings from its restructuring initiatives, incremental contribution from Annie’s which will offset headwinds from higher input costs. Input cost inflation is expected to be 2% in fiscal 2016.
Adjusted earnings per share (constant currency) are expected to grow at a mid single-digit rate. Currency headwinds are expected to hurt earnings by 4 cents.
Stocks to Consider
General Mills carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the food sector are Cal-Maine Foods, Inc. CALM, Campbell Soup Company CPB and McCormick & Company, Incorporated MKC. All these stocks carry a Zacks Rank #2 (Buy).
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