Investors had some big questions heading into General Mills' (GIS -1.31%) fiscal 2021 second-quarter earnings report. The snack and cereal giant had recently posted impressive growth thanks to a new global focus on at-home eating. But it wasn't clear that this boost could sustainably improve its earnings prospects.
This past week, General Mills gave investors new reasons to buy into that bullish outlook. Its report showed solid sales and profit gains through November. More importantly, it suggested the company is winning over new customers who might stick around long after the pandemic threat fades.
Let's take a closer look.
Sales gains for General Mills
Sales gains slowed from the prior quarter's double-digit percentage spike, which itself was a deceleration from the pandemic peak of 16% year-over-year growth set two quarters back. But General Mills still notched solid revenue gains, with organic sales rising 7% year over year.
Contributing to those gains were strong performances in the U.S. retailing segment that supplies supermarket chains with baking products, yogurts, and cereal. General Mills enjoyed spiking demand in its pet food segment, too.
That success completely offset declining sales to cafeterias, restaurants, and convenience stores and delivered another quarter of market share growth. "We executed very well again in the second quarter," CEO Jeff Harmening said in a press release.
General Mills' costs were held in check
Harmening had warned investors back in late September to brace for sluggish earnings results through the rest of fiscal 2021. But that profit drop didn't show up in this latest report. Instead, gross profit margin inched higher thanks to a healthy balance between rising sales volumes and increased prices.
Adjusted operating margin held steady and helped adjusted earnings per share rise 9% to modestly outpace the revenue boost.
Stepping back, General Mills has posted improving profit margins and reduced expenses even as sales rose 8% over the last six months. These trends allowed operating profit to jump 20% in that time, to $1.8 billion.
A more specific outlook for fiscal 2021
Consumer-demand swings appear to have slowed to the point that management feels comfortable issuing a short-term outlook again. Executives believe the pandemic will keep elevating demand for its snack and breakfast products so that organic sales in the third quarter rise at about the same rate that investors saw this past quarter. Operating profit will be similarly boosted, and management now predicts that margins will be steady rather than fall slightly.
That outlook implies General Mills will post a second straight fiscal year of unusually strong sales and profits in 2021. Sure, it's not clear how many of these new customers will remain loyal to its brands once consumer mobility shifts back to normal and the restaurant industry recovers. But General Mills is capitalizing on this opportunity to build a foothold in shopper demographics that it previously couldn't reach.
Its chances of converting most of these people into long-term fans of its consumer staples products rises with each passing month, and that's why the company is focused on delivering a consistently strong product. "We believe the work we're doing today ... to deepen our connection with consumers will translate to profitable growth and shareholder value creation over the long term," Harmening said.