General Mills (NYSE:GIS) purchased Blue Buffalo Pet Products in April 2018 with the express purpose of adding a fast-expanding category to its staid lineup of traditional consumer packaged goods (CPG) offerings. In fiscal second-quarter 2020 results released Wednesday morning, the company's pet division played its intended role, injecting a spark of growth into otherwise flat results. As we walk through the consumer staples titan's report below, bear in mind that all comparative numbers refer to the prior-year quarter.

General Mills: The big-picture numbers

Metric Q2 2020 Q2 2019 Change
Revenue $4.4 billion $4.4 billion (0%)
Net income $580.8 million $343.3 million 69.2%
Diluted EPS $0.95 $0.57 66.7%

Data source: General Mills. EPS = earnings per share.

Essential details from the quarter

Close-up of a young girl eating cereal.

Image source: Getty Images.

  • Organic revenue (reported revenue adjusted for acquisitions, dispositions, and foreign currency effects) improved by 1% on higher volume, which management attributed to the company's pet business.
  • North American retail sales, the company's largest revenue stream, were flat against the prior year at $2.68 billion. In keeping with a recent trend, U.S. cereals sales growth of 5% offset a 2% decline in U.S. snacks and a 4% dip in U.S. yogurt. 
  • Pet segment sales jumped 16% to $389 million, enjoying volume growth, positive pricing power, and a favorable product mix. Management particularly noted the strength of Blue Buffalo's two biggest product lines, Life Protection Formula and Wilderness, as drivers of the vibrant top line.
  • Convenience and food-service sales were essentially flat at $514 million. Positive sales momentum in cereals, frozen foods, and yogurt absorbed the continuing effects of a difficult pricing environment for bakery flour products.
  • The top line in the Europe and Australia segment decreased by 5% to $433 million. However, after adjusting for a significant foreign currency impact, organic sales declined by just 1%.
  • Reported revenue in the Asia and Latin America segment decreased by 5% to $410 million. Adjusting for a 4-percentage-point impact from divestitures and 1 percentage point of foreign currency translation, organic sales improved by 1%.
  • Gross margin advanced by 130 basis points to 35.5%. Management cited the company's "Holistic Margin Management" cost savings program as the main force behind the profitability improvement.
  • General Mills' net earnings jumped significantly this period (as seen in the table above) due to $209.4 million of restructuring and impairment charges booked in the second quarter of fiscal 2019. Even after accounting for these charges, operating income of $811.2 million in the current quarter still expanded by 7.2% against Q2 2019.

Management's perspective

As I had mentioned in my earnings preview, General Mills needed to show organic revenue improvement this quarter to avoid having to revamp its full-year financial outlook. In the company's earnings press release, CEO Jeff Harmening addressed current sales trends and also discussed the second quarter's impact on guidance:

I'm encouraged by our second-quarter performance, including the broad-based improvement in our organic sales trends and positive results on the bottom line. We will build on our topline momentum in the second half, fueled by increased investment in our brands. Based on our first-half results, and with confidence in our back-half plans, we are reaffirming our full-year fiscal 2020 guidance for sales, profit, and EPS and raising our guidance for free cash flow conversion.

Looking ahead to the back half of fiscal 2020

The guidance Harmening refers to above includes year-over-year organic revenue growth of 1% to 2% and adjusted operating profit growth of 2% to 4% against the $2.86 billion in adjusted earnings booked in fiscal 2019. General Mills anticipates expanding adjusted diluted EPS by 3% to 5% over the $3.22 it earned last year. Finally, management ramped up its free cash flow conversion target of 95% for fiscal 2020 to 105%. This means that the company now expects to generate free cash flow of at least 105% of adjusted net income in the current fiscal year. Overall, shareholders seemed comfortable with the current quarter's performance and management's full-year financial targets: General Mills shares were up 1.5% in mid-morning trade on Wednesday.