General Mills, Inc.’s (GIS - Free Report) cost-saving initiatives helped it to report better-than-expected third-quarter fiscal 2017 earnings along with solid adjusted operating profit margin expansion. However, the company’s shares lost 1.44% in premarket trade on Mar 21, as sales missed expectation.
The food giant reported third-quarter fiscal 2017 adjusted earnings per share of 72 cents, surpassing the Zacks Consensus Estimate of 71 cents by 1.4%. Earnings also improved 11% year over year. On a constant currency basis, earnings grew 8%.
Adjusted earnings exclude restructuring, project-related expenses, as well as mark-to-market valuation effects. Including these items, reported earnings were 61 cents per share, up 3% year over year.
Sales Remain Weak
Total revenues declined 5.2% year over year to $3.79 billion owing to lower organic sales. Sales were below the Zacks Consensus Estimate of $3.82 billion. Sales were also weak in the core U.S. Retail segment as well as in other segments.
Organically, excluding currency and acquisitions/divestures, sales were down 5%.
Price/mix improved 2%, whereas volumes declined 7%. Foreign exchange headwinds did not impact quarterly revenues.
Adjusted gross margin increased 20 basis points (bps) to 35%, as input cost inflation and lower volumes were offset by savings from cost-reduction activities.
Adjusted operating margin increased 100 bps to 16.9% owing to lower administrative as well as media and advertising expenses.
Beginning third quarter of fiscal 2017, the company has started reporting results under four new business groups: North America Retail, which combines U.S. retail segment and Canada region in international segment; Convenience Stores & Food Service; Europe & Australia, which is currently another international region; and Asia & Latin America, which combines the remaining two current international regions.
This structural change aims at maximizing global scale, unlocking global growth opportunities and driving efficiency.
North America Retail: Revenues from this segment declined 7% year over year to $2.50 billion due to double-digit declines in the U.S. Meals & Baking and U.S. yogurt operating units. Organic sales were down 8%. Volumes dipped 10%, while price/mix added 2% to revenues.
Segment operating profit was also down 7% year over year due to lower volumes.
Convenience Stores & Food Service: Revenues declined 1% year over year to $448 million. Some frozen dough products partially offset the growth of the Focus 6 platforms, including cereal, biscuits, and yogurt. Organically, sales were also down 1%.
While volumes were up 1%, price/mix impacted revenues by 2% in the quarter.
Segment operating profit was up 3% year over year given the company’s cost-saving initiatives.
Europe & Australia: On a year-over-year basis, the segment’s revenues declined 3% to $424 million. Unfavorable currency headwind offset growth in Häagen-Dazs ice cream, Old El Paso Mexican products, and Nature Valley snacks. Organically, sales were up 2%.
Foreign exchange headwinds dragged revenues by 5% in the quarter. Volumes were up 1% and price/mix had a 1% favorable impact on the quarter’s results.
Segment operating profit grew 25% year over year reflecting solid cost-saving initiatives and favorable mix.
Asia & Latin America: Revenues were in line with the year-ago figure amounting to $421 million. Foreign currency exchange had a favorable impact on revenues. Additionally, growth in Häagen-Dazs ice cream was offset by the restructuring of the snacks business in China, the net impact of divestitures and acquisitions in fiscal 2016, and declines in Latin America driven by macroeconomic challenges. Organically, sales were down 2%.
While volumes were down 3%, price/mix had a favorable impact of 1% on the quarter’s results.
Segment operating profit was up 300% year over year.
Fiscal 2017 Guidance Maintained
Organically, year-over-year sales growth is expected to drop approximately 4%. This is primarily due to a widening gap between the company's level of promotional activity and that of competitors in the U.S. yogurt and soup categories.
Adjusted earnings per share (constant currency) guidance has been maintained at the growth rate of 5% to 7% from the fiscal 2016 level.
Total segment operating profit growth is estimated in the range of -1% to 1%, on a constant currency basis. Adjusted operating profit margin is expected to expand 120 basis points to 18%.
General Mills carries a Zacks Rank #3 (Hold).
Stocks to Consider
Better-ranked stocks in the consumer staples sector are Conagra Brands, Inc. (CAG - Free Report) , J & J Snack Foods Corp. (JJSF - Free Report) and Pinnacle Foods, Inc. (PF - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ConAgra Foods delivered an average positive earnings surprise of 13.30% in the trailing four quarters. J & J Snack Foods’ earnings are expected to increase 8% this year.
Pinnacle Foods delivered an average positive earnings surprise of 1.73% in the trailing four quarters and has a long-term earnings growth rate of 8.3%.
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