General Mills (GIS 1.06%) this past week announced a discouraging return to sales declines after two consecutive quarters of modestly positive results. The packaged foods giant said organic revenue fell as improvements in its core U.S. business, and in the booming pet division, were overwhelmed by significant volume declines across each of its three remaining segments.
Yet the company affirmed all of its key fiscal 2020 objectives, implying better operating results over the next few quarters. Let's look at some of the factors that CEO Jeff Harmening and his team think will support a strengthening of the business ahead.
1. Getting closer to even
LY = last year. Image source: General Mills.
Executives highlighted what they called "encouraging improvement" in General Mills' core U.S. retailing segment that includes sales of categories like yogurt, cereal, and snacks to major supermarkets and warehouse clubs. That division logged a modest 1-percentage-point volume decline that was offset by higher pricing to leave overall organic sales flat.
The results don't imply a return to market share gains yet, but the core business isn't shrinking, either. Instead, innovation in brands like Cheerios, Nature Valley, and Yoplait has brought the segment within striking distance of growth following declines in each of the last three fiscal years.
Image source: Getty Images.
Pet food was another bright spot, with the Blue Buffalo franchise growing by a mid-teens percentage after adjusting for an extra selling week in the prior-year period.
2. Missed opportunities
Image source: General Mills.
While the U.S. retail and pet food divisions were impressive, executives noted weakness in its international units and its specialty retail section. "We got off to a slower start in our other segments," Harmening said in a press release, "and we're taking actions to drive topline improvement for those segments ... starting in the second quarter."
In the presentation, management said the stumbles, which drove sales volumes declines ranging from 6% to 11%, were caused by limited challenges such as economic issues in Brazil and weak flour demand in convenience stores and supermarket bakeries. General Mills is predicting a quick recovery, though, with sales trends improving in these categories through the rest of the fiscal year.
3. Margin wins
OP = operating. Image source: General Mills.
General Mills' profitability has been a bright spot for investors in recent quarters, and that positive trend hasn't changed. Operating margin is up to 17% of sales and gross profit margin rose by nearly 2 full percentage points this quarter. These gains resulted in higher earnings than management had predicted, even though sales came in below their expectations.
The company is planning to scale up marketing support for its brands over the next few months, which helps explain why its full-year earnings targets didn't get an upgrade. General Mills still believes organic sales will rise by between 1% and 2%, compared to a flat result last year.
Investors keeping track will remember that the company had essentially the same growth forecast for fiscal 2018, before scaling it back later in the year. For General Mills to avoid a similar downgrade this year, sales growth will need to speed up over the next nine months, particularly in its international retailing segments.
