General Mills Inc. (GIS - Free Report) began fiscal 2014 on a strong note with the first adjusted earnings increasing 6% year on year to 70 cents per share. The quarterly earnings were in line with the Zacks Consensus Estimate. Earnings growth was driven by decent revenue performance which made up for the soft margins in the quarter.
Moreover, the company maintained the previously-provided impressive outlook for fiscal 2014.
Revenues and Margins
Total revenue of the global consumer food company increased 8.0% year over year to $4.37 billion and beat the Zacks Consensus Estimate of $4.314 billion. Revenues benefited from the newly acquired international businesses like Yoki Alimentos in Brazil and Yoplait Canada which added 5% to top-line growth. Moreover, increased contribution from new products like Yoplait Greek yogurt and Pillsbury gluten-free dough also helped improve revenues.
Price/mix added 1% to revenues, better than a 1% decline in the sequentially preceding quarter. Volume contributed 8% to revenues. Most of the volume growth was driven by acquisitions. However, foreign exchange dragged revenues by 1%.
Adjusted gross margin declined 130 basis points (bps) to 36.9%, mainly due to higher input costs and changes in business mix. Adjusted operating margin declined 60 bps to 16.9% in the quarter due to a 7% increase in advertising costs. Encouragingly, however, both gross and operating margins improved sequentially.
U.S .Retail: Revenues from the U.S. Retail segment improved 3.6% year over year to $2.58 billion in the quarter driven by growth in both volume and price/mix. Volumes grew 1% year over year while price/mix grew 3%.
Sales growth in the Snacks, Big G cereal, Baking Products and Small Planet Foods divisions offset the decline in the Meals segment. The Yoplait yogurt and Frozen Foods businesses delivered in-line results.
Encouragingly, the core product categories, cereals and yogurt showed some improvement in the first quarter after underperforming in fiscal 21013. The core cereals business did not do well in fiscal 2013 and sales declined 2% in the year due to weak category growth. In fact, the company lost market share in cereals in 2013.
Also, yogurt sales declined 5% in the year, missing management’s expectation of growth. Management is taking steps to re-invigorate these priority businesses through innovation, increased marketing support and expanded distribution for new products in fiscal 2014.
Despite higher advertising expenses, segment operating profit increased 6.4% to $611.9 million due to pricing gains.
International: Revenues in the International segment grew 21.7% year over year to $1.32 billion benefiting largely from acquisitions. Volume added 30%, mostly from the acquisitions of Yoki and Yoplait International, while price/mix took away 5% from net sales growth. Foreign exchange had an unfavorable 3% impact on net sales.
On a constant currency basis, international revenues grew 25% in the quarter. Constant currency revenues grew 196% in Latin America due to the addition of Yoki. Constant currency revenues grew 21% in Canada gaining from the addition of Yoplait Canada. Constant currency revenues declined 3% in Europe but grew 13% in Asia Pacific.
Segment operating profit was flat at $125.6 million as top-line growth was offset by higher input costs, currency headwinds and increased advertising/marketing expenses.
Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment’s quarterly revenues declined 0.8% to $467.8 million due to weak volumes. Volume declined 3% in the quarter. Segment operating profit increased 9.5% year over year to $74.1 million.
Fiscal 2014 Outlook Retained
The company maintained its previously provided outlook for fiscal 2014. In fiscal 2014, General Mills expects stronger earnings growth and increased cash returns to shareholders. Growth in fiscal 2014 is expected to be in line with its long-term targets.
Earnings per share are expected to grow at a high single-digit rate in the range of $2.87 to $2.90. Earnings growth in fiscal 2014 is expected to be driven by strong innovation, increased brand support, modest cost inflation, increased contribution from the Yoki and Yoplait acquisitions and aggressive cost savings.
The company continues to expect net sales to grow at a low single-digit rate and exceed $18 billion in fiscal 2014 on the back of product innovation and contribution from new businesses.
Adjusted gross margin is projected to improve modestly from the 2013 levels. Segment operating profit is expected to grow in mid-single digits. The company expects margins to expand in fiscal 2014 on the back of cost savings.
Other Stocks to Consider
General Mills carries a Zacks Rank #4 (Sell). Other food companies which are currently doing well include Pinnacle Foods Inc. (PF - Free Report) , Green Mountain Coffee Roasters, Inc and Dole Food Company Inc. . While PF and GMCR carry a Zacks Rank #1 (Strong Buy), DOLE carries a Zacks Rank #2 (Buy).