Please ensure Javascript is enabled for purposes of website accessibility

General Mills Returns to Growth

By Demitri Kalogeropoulos - Updated Apr 14, 2019 at 8:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The snack and cereal giant took another small step towards stabilizing sales this quarter.

Investors had expressed growing optimism heading into General Mills(GIS 1.06%) fiscal third-quarter report. The snack and cereal giant has been struggling with major shifts in demand in its core packaged food business, but its last earnings announcement contained faint signs of a building rebound.

In its business update this week, the company again achieved impressive financial gains, which helped it outperform most investors' earnings expectations. However, it came up short in sales, leading to a growth downgrade by the management team.

More on that declining outlook in a moment. First, here's a look at its headline results:

 Metric

Q3 2019

Q3 2018

Change (YOY)

Revenue

$4.2 billion

$3.9 billion

8%

Net income

$447 million

$941 million

(52%)

EPS

$0.74

$1.62

(54%)

Data source: General Mills' financial filings. YOY = year over year.

What happened with General Mills this quarter?

The financial picture brightened considerably, with gains in gross and operating margins combining to push adjusted profits higher. General Mills couldn't find much growth outside of its newly acquired pet food brand, though.

A boy and a girl eating cereal at a kitchen island

Image source: Getty Images.

Here are the key highlights of the quarter:

  • Organic sales trends improved to a 1% increase from a 1% decline in the prior quarter. That growth combined with robust gains in the Blue Buffalo pet food franchise to push overall revenue up 8%, or 10% after accounting for currency exchange rate shifts.
  • Gross profit margin rose by 1.7 percentage points, mainly thanks to cost cuts and the benefit of more sales from the Blue Buffalo brand.
  • General Mills took several charges related to its restructuring plan, along with the divestment of an underperforming food brand. Yet operating profit still shot higher to $651 million, or 15.5% of sales, from $569 million, or 14.7% of sales a year ago.
  • Cash generation again beat management's targets, with operating cash reaching $2 billion over the past nine months. That's down from $2.1 billion in the prior year, but General Mills has taken over $200 million of restructuring charges so far in fiscal 2019.

Check out the latest earnings call transcript for General Mills.

What management had to say

Executives highlighted the big-picture wins in the selling period. "We had a strong third quarter," CEO Jeff Harmening said in a press release, "with positive organic sales growth and significant operating margin expansion."

Management believes the latest trends show that their rebound efforts are working. "Our improved execution and strengthened performance this year reinforce our view that a balanced approach to top and bottom-line growth will drive long-term value for our shareholders," Harmening continued.

Looking forward

General Mills has just one quarter left in its fiscal year, but recent results were volatile enough to prompt updates to nearly all of its 2019 targets. Its financial goals were all lifted slightly, with adjusted operating profit on pace to hit the high end of its 9% to 10% growth target. General Mills also expects to convert just over 100% of its free cash flow into earnings, up from its prior goal of 95%.

The company believes the current quarter will bring a significant sales and profit acceleration in the Blue Buffalo segment, but the outlook isn't as bright for the broader cereal and snack business. That division should land at around flat growth, executives said, or at the low end of their prior forecast.

While the minor sales downgrade is a surprise, it doesn't knock General Mills off of its recovery path. Instead, the snack giant is on track to stabilize its revenue and improve its earnings profile just as it prepares to enter fiscal 2020.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Mills, Inc. Stock Quote
General Mills, Inc.
GIS
$67.72 (1.06%) $0.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.