Investors had high hopes that General Mills (GIS +0.56%) would have good news to report in its fiscal second-quarter earnings announcement. The consumer packaged foods giant has been struggling with flat or falling demand for two years, but its latest results suggested that growth could return in 2019 even as cost cuts boost the earnings power of the business.
On Wednesday, General Mills executives said that they were able to achieve higher sales this quarter, along with a sharp jump in operating profit margin. The company forecast accelerating growth results over the next six months, too.
Let's dive right in.
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Getting back to growth
As expected, the company returned to growth in its core organic sales figure, with revenue rising 1% compared to a 1% decline last quarter and a flat results for the prior full fiscal year. That increase was admittedly tiny, but it was powered by higher volume rather than rising prices, which suggests General Mills has room to further improve on this score over the next six months.
Looking deeper into the results, the core U.S. retail business was flat while the pet segment shot higher thanks to expanded distribution of Blue Buffalo products. General Mills' international segments continued to shrink, but the pace of declines improved -- just as management predicted back in September. "I'm encouraged by our second-quarter performance," CEO Jeff Harmening said in a press release, "including the broad-based improvement in our organic sales trends."
Cutting costs
The news on the financial side of the business was decidedly positive. Gross profit margin improved by nearly a full percentage point to 35.3% of sales as the company offset increasing commodity costs with manufacturing savings.
That success flowed down to the bottom line, where adjusted operating profit rose 7% to $814 million, allowing operating margin to jump to 18.4% of sales from 17.3% a year ago. General Mills also benefited from lower interest expenses thanks to its aggressive use of cash to pay down debt. The food stock's operating cash flow improved 4% over the past six months to $1.46 billion.
Doubling down on 2020
The solid results put General Mills in position to achieve the annual growth acceleration that management has been targeting since late last year. "We will build on our topline momentum in the second half [of fiscal 2020]," Harmening predicted, "fueled by increased investment in our brands."
That extra brand spending should keep adjusted operating profit growth to about 3% this year, management said, but should support organic sales gains of between 1% and 2%. Both of these targets are unchanged from General Mills' prior official outlook from September.
The company did boost its forecast for free cash flow and now sees that metric reaching at least 105% of adjusted earnings rather than the 95% goal that management articulated three months ago. Investors can take that upgrade as another small sign that financial trends are heading in the right direction today. Yet it will be another few months before shareholders can know for sure whether General Mills' operating metrics are finally breaking out of their multiyear funk.
