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General Mills Inc. (GIS - Analyst Report) reported dismal second-quarter fiscal 2014 results missing the Zacks Consensus Estimate for both revenues and sales due to lower sales in the U.S retail business and high input costs in the quarter. Though management maintained its fiscal 2014 earnings outlook, it warned that higher-than-expected currency headwinds could result in earnings coming in at the lower end of the guided range.

Second-quarter fiscal 2013 adjusted earnings declined 3.5% year on year to 83 cents per share. The quarterly earnings also missed the Zacks Consensus Estimate of 88 cents. Both revenues and margins were weak in the quarter as the company faced difficult year-ago comparisons and the highest quarterly input cost inflation of the fiscal year in the second quarter.

Adjusted earnings exclude the impact of mark-to-market gains and restructuring costs.

Revenues and Margins

Total revenue of the global consumer food company was flat year over year at $4.88 billion but missed the Zacks Consensus Estimate of $4.931 billion. The top line was hurt by difficult year ago comparisons, slowdown in food/beverage industry sales across U.S and other key developed markets, and a shift in the U.S Thanksgiving holiday this year.

Price/mix added 1% to revenues, same as in the first quarter. Volumes were almost flat, much lower than 8% in the first quarter. Foreign exchange dragged revenues by 1%.

Adjusted gross margin declined 100 basis points (bps) to 35.7% mainly due to higher input costs. Despite a 3% decrease in advertising costs, adjusted operating margin declined 70 bps to 17.4% in the quarter due to weak volumes and gross margins.

Segment Performance

U.S.Retail: Revenues from the U.S. Retail segment declined 0.7% year over year to $2.97 billion in the quarter due to volume shortfall. Volumes declined 2% year over year while price/mix grew 1%.

Sales growth in the Snacks, Big G cereal and Small Planet Foods divisions were offset by declines in the Meals, Baking Foods, Yoplait yogurt and Frozen Foods businesses.

Despite lower advertising expenses, segment operating profit declined 6% to $682 million due to lower revenues.

International: Revenues in the International segment grew 1.6% year over year to $1.40 billion due to price/mix gains as well as volume growth. Volume added 2%, while price/mix added 3% to net sales growth. Foreign exchange had an unfavorable 3% impact on net sales.

On a constant currency basis, international revenues grew 5% in the quarter. Constant currency revenues grew 22% in Latin America led by Brazil, 5% in Asia Pacific driven by China and 4% in Canada. Constant currency revenues declined 2% in Europe due to macroeconomic uncertainty in the country.

Segment operating profit grew 10% to $153 million due to price/mix gains.

Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment’s quarterly revenues declined 1.7% to $507.0 million due to price/mix decline. Volumes were flat in the quarter. Segment operating profit declined 12% year over year to $85.0 million.

Fiscal 2014 Outlook Retained

Management maintained its earnings per share guidance for fiscal 2014. Earnings are still expected to grow at a high single-digit rate in the range of $2.87 to $2.90. However, management warned that currency headwinds will be greater than previously anticipated and any possible devaluation in the Venezuelan currency could result in earnings meeting just the bottom end of the guided range.

Management expects earnings to accelerate in the second half due to strong new product launches, lower input cost inflation and easing year-ago comparisons.

Other Stocks to Consider

General Mills carries a Zacks Rank #4 (Sell). Other better-ranked stocks in the food industry include The Hain Celestial Group, Inc. (HAIN - Analyst Report), Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report) and United Natural Foods, Inc. (UNFI - Analyst Report). All the three companies carry a Zacks Rank #2 (Buy).

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