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General Mills (GIS) Misses Q2 Earnings, Updates View

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General Mills, Inc. (GIS - Free Report) reported second-quarter fiscal 2017 adjusted earnings per share of 85 cents that missed the Zacks Consensus Estimate of 88 cents by 3.4%. However, earnings improved 4% year over year. On a constant currency basis, earnings also grew 5%.

Adjusted earnings exclude divesture losses, restructuring as well as project-related expenses and mark-to-market valuation effects. Including these items, reported earnings were 80 cents per share, down 8% year over year.

Sales Remain Weak

Total revenue declined 7.1% year over year to $4.1 billion owing to the Green Giant divesture and lower organic sales. Sales were also below the Zacks Consensus Estimate of $4.2 billion. Sales were weak in the core U.S. Retail segment as well as for the other segments.

General Mills’ shares lost 3.7% in premarket trade on Dec 20, after the company missed profit as well as sales expectations.

Organically, excluding currency and acquisitions/divestures, sales were down 4%.

Price/mix improved 3 percentage points whereas volumes declined 10 percentage points. Foreign exchange headwinds had a neutral impact on quarterly revenues.

Margins Improve

Adjusted gross margin increased 130 basis points (bps) to 36.8% as input cost inflation was more offset by savings from cost reduction activities.

Adjusted operating margin increased 160 bps to 19.6%.

Segment Performance

U.S. Retail: Revenues from the U.S. Retail segment declined 8.7% year over year to $2.52 billion due to lower volumes. Volumes declined 14 percentage points, while price/mix added 5 percentage points to revenues.

Sales and profits in the U.S. Retail segment, accounting for 61% of its quarterly sales, have been declining over the last few quarters due to lower demand amid weak food industry trends and changing food preferences of consumers.

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

International: Revenues at the International segment declined 4.7% year over year to $1.10 billion because of headwinds from currency fluctuations. Foreign exchange had a 2-percentage point unfavorable impact on net sales.

While volumes declined 3 percentage points, foreign exchange headwinds impacted revenues by another 2 percentage points in the quarter.

Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment’s revenues fell 3.6% to $487.5 million. Increases for the yogurt, mixes, and cereal platforms were offset by market index pricing on bakery flour in the quarter.

Foreign exchange headwinds dragged revenues by 4 percentage points in the quarter.

Fiscal 2017 Outlook

Organically, year-over-year sales growth is now anticipated to drop between 3% and 4%, wider than the earlier expectation of flat to down 2% for fiscal 2017.

Adjusted earnings per share (constant currency) guidance is maintained at the growth rate of 6--8% from the fiscal 2016 level of $2.92 per share.

Currency headwinds are expected to hurt 2017 earnings by 1 cent (previously expectation was 2 cents).

Total segment operating profit growth is estimated to increase in the range of 2--4%, lower than the earlier projection of 6–8% growth on a constant currency basis. However, guidance for adjusted operating profit margin expansion is reaffirmed at approximately 150 bps.

The company now expects free cash flow to surge at a high single-digit rate, up from the earlier expectation of mid single-digit growth. The upside was driven by accelerated progress on core working capital management.

General Mills carries a Zacks Rank #3 (Hold).

GENL MILLS Price, Consensus and EPS Surprise


GENL MILLS Price, Consensus and EPS Surprise | GENL MILLS Quote

Stock to Consider

A better-ranked stock in the consumer staples sector is Lancaster Colony Corporation , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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