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General Mills Cost Savings Support Growth; Sales Sluggish

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We issued an updated research report on General Mills, Inc. (GIS - Free Report) , a leading global manufacturer and marketer of branded consumer foods, on Jul 5, 2016.

Better-Than-Expected Q4

General Mills reported better-than-expected fourth-quarter fiscal 2016 results on Jun 29, beating the estimates for both earnings and sales. Adjusted earnings of 66 cents per share declined 12% year over year as restructuring cost savings and a lower tax rate were offset by a 9% net sales decline and higher input costs. However, organic sales rose 1% - turning positive after several quarters of decline.

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Aggressive Cost Savings

Importantly, concurrent with the fiscal fourth-quarter earnings release, General Mills increased its cost savings target from its various restructuring projects.

General Mills is currently pursuing several multi-year restructuring initiatives — Projects Century, Catalyst, and Compass – which include job cuts and factory closings, to generate cost savings to support its key growth strategies. The projects as well as administrative cost reductions from zero-based budgeting generated cost savings of $350 million in fiscal 2016 which were ahead of management’s expectations. Consequently, the company raised its guidance for cost savings to $600 million by fiscal 2018, higher than $500 million expected previously, as it accelerates its margin expansion efforts.

Over the next two years, the company expects to achieve cost savings through increased efficiency, reduced complexity through SKU optimization, further supply chain optimization and continued expansion of zero-based budgeting across the business, which will result in an accelerated margin expansion.

It has therefore raised its operating margin expectation to 20% by fiscal 2018, up from the previous target of 18% by fiscal 2020.

Robust restructuring savings are making up for slower revenue growth at General Mills.

Slow Sales Growth

Sales and profits at General Mills’ U.S. Retail segment, contributing 60% to its sales, have been soft due to lower demand amid changing consumer food preferences.

General Mills, like many other U.S. food producers like Kellogg Company (K - Free Report) , The Kraft Heinz Company (KHC - Free Report) , and Mondelez International, Inc. (MDLZ - Free Report) , has been struggling due to the shift in consumer preference toward natural and organic food over packaged and processed food.

In fiscal 2016, General Mills in order to adapt to evolving food preferences of the consumers invested in consumer-focused innovation and marketing and accelerated the natural and organic product portfolio to boost sales. The innovation and renovation efforts helped improve top-line momentum on many businesses in fiscal 2016 - mainly U.S. Cereals and Snack bars.

In fiscal 2017 and fiscal 2018 General Mills plans to invest in growing brands and platforms, including cereals, snack bars, and natural and organic portfolio in the U.S. Retail segment; all markets in the International segment; and cereal, yogurt, snacks, frozen meals, biscuits, and baking mixes in the Convenience Stores and Foodservice segment. Net sales for these "Growth" businesses – which represent approximately 75% of sales and operating profit – are expected to grow at a low single-digit organic rate in fiscal 2017. Most of the growth businesses showed positive momentum in fiscal 2016 and management plans to drive growth in these businesses in 2017 through innovation, renovation along with media and in-store support.

Though the company expects slower revenue growth in the next two years, a focus on its Growth brands and categories should push sales growth in the long term.

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