Can General Mills Sustain Its Momentum in a Tough Environment?

General Mills has gotten off to a good start this year, but will this continue?

Mar 26, 2014 at 9:59AM

Global agricultural production will grow at a rate of just 1.5% annually in the ongoing decade, according to OECD-FAO research . In addition, production shortfalls and the growing world population will drive up commodity prices. This will have an impact on the companies that produce packaged foods from agricultural produce.

General Mills (NYSE:GIS), Kellogg (NYSE:K), and Mondelez (NASDAQ:MDLZ) all operate in the packaged-foods market space, as they buy agricultural produce and process it into a wide array of packaged foods. General Mills has an impressive achievement to its credit, as it has paid dividends for 115 years without missing a beat . Let's take a look at how General Mills stacks up against its peers.

Off to a good start
General Mills had a very robust start to its fiscal 2014 as it came up with 8% year-over-year growth in revenue in the first quarter. However, it disappointed the market when it failed to sustain the momentum into the second quarter, and things didn't look any better during the third quarter as well. As a result of a shorter holiday season and inclement weather, revenue declined 1% year-over-year to $4.38 billion .

However, on the brighter side, the international segment witnessed a 2% year-over-year growth on a reported basis and 7% on  a constant currency basis. All four regions achieved constant currency net sales gains, with Latin America and Asia Pacific registering double-digit growth.

The way forward
Going forward, General Mills expects improvements in the food and beverages industry during the second half of the fiscal year. The company also expects low-single digit net sales growth, which will be primarily fueled by a pipeline of new and innovative products on which it has concentrated to counter the general weakness in the cereals business in developed markets.

For example, General Mills brought protein to the cereal aisle in June with Nature Valley Protein Granola . Other innovations include two varieties of Fiber One Protein cereal. The company also plans to strengthen its Cinnamon Toast Crunch and Cheerios lineups with new varieties. Across the U.S., General Mills will launch more than 50 new products in the second half of the fiscal year. General Mills already launched more than 100 items in the first half of the year. In addition, General Mills has been quick to win back consumers who oppose genetically modified organisms, or GMOs, as it moved to make its original Cheerios breakfast cereals GMO-free .

The company expects product innovation, marketing, and consumer focus to drive its growth during fiscal 2014. Despite a not-so-friendly retail environment ahead and the currency headwinds, General Mills retained its fiscal 2014 outlook. It expects its earnings to grow at a high single-digit rate in the range of $2.87-$2.90 per share.

Peers' moves
Kellogg, like General Mills, has also been plagued with declining cereal sales in the United States. Much like its peer, Kellogg has also chosen to innovate in order to win back customers and stir demand for its products in the cereals business. The company is also leaving no stone unturned in order to woo consumers who are attracted by the health halo surrounding natural and GMO-free items.

For fiscal 2014, Kellogg has a strong pipeline of innovative products that include the new Special K Chocolate Almond, Krave cereal, Touch of Fruit Mini-Wheats, Bear Naked granola, and new Kashi cereals that include three varieties of Organic Promise, all of which are GMO-free.

Mondelez's fourth quarter wasn't any better than those of its peers as its revenue declined. However, Mondelez saw a meager 0.1% year-over-year decline, which isn't terrible compared to the 1.7% drop at Kellogg. An economic slowdown in the emerging markets contributed to Mondelez's weak performance. Management wasn't happy with Mondelez' first-year performance as a global snacks company and called it disappointing.

Moreover, Mondelez admits that its margins remain lower than those of its peers . Going forward, Mondelez aims to set this right by increasing its operating margin from 12% in fiscal 2013 to 14%-16% by 2016. To achieve this, the company will employ the services of Accenture to implement a zero-based budgeting system. In addition, Mondelez has also focused on improving its supply chain to drive long-term growth. As a result of these initiatives, Mondelez expects $3 billion in gross productivity savings, $1.5 billion in net savings, and $1 billion in incremental cash over the next three years.

Bottom line
General Mills has performed well in a tough environment. Although it faces headwinds, the company expects to hold its earnings steady. Also, new product introductions should enable General Mills to post stronger revenue growth in the future. Moreover, the dividend-paying and stable nature of General Mills is another reason why investors could consider an investment in this stock.

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Shirish Mudholkar has no position in any stocks mentioned. The Motley Fool recommends Accenture. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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