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General Mills (GIS) Beats on Q1 Earnings, Sales Down Y/Y

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General Mills, Inc. (GIS - Free Report) released first-quarter fiscal 2020 results, which marks its sixth straight earnings beat. Moreover, the bottom line improved on a year-on-year basis. However, sales missed estimates and fell year on year. Most of the operating segments displayed sluggishness, which put pressure on the top line.

Highlights of the Release

The company’s adjusted earnings per share of 79 cents increased 13% year over year on a constant-currency (cc) basis. The bottom line beat the Zacks Consensus Estimate of 77 cents. The upside was fueled by reduced adjusted effective tax rate and net interest expenses as well as higher adjusted operating profit and non-service benefit plan income. These were somewhat offset by higher average shares outstanding.

Net sales of $4,002.5 million declined 2.2% year over year and missed the Zacks Consensus Estimate of $4,092 million. Except the Pet unit, sales in other segments were dismal.

General Mills, Inc. Price, Consensus and EPS Surprise



Organic sales inched down 1% due to lower organic volume. This was somewhat compensated by positive organic net price realization and mix across most segments

Adjusted gross profit amounted to $1,410.6 million, up nearly 2.5%. Adjusted gross margin expanded 160 basis points (bps) to 35.2%. Markedly, adjusted gross margin in the prior-year quarter included a one-time purchase accounting inventory adjustment associated with the Blue Buffalo acquisition.

Adjusted operating profit came in at $682.1 million. The metric improved 7% at cc, courtesy of gains from the purchase accounting impact in the prior-year quarter. Adjusted operating margin improved 130 bps to 17%.

Segmental Performance

North America Retail: Revenues in the segment came in at $2,376 million, down 0.5% year over year. Gains from net price realization were countered by lower volume contributions. Sales in categories such as U.S. Snacks, U.S. Meals & Baking unit and Canada were dismal. Further, organic net sales were flat compared with the year-ago quarter’s level.

Convenience Stores & Foodservice: Revenues declined 4% year over year to $445 million, due to sluggishness in bakery flour volumes and adverse impacts of index pricing. These were partially offset by growth in the Focus 6 platforms. Organically, sales decreased 4% from the year-ago quarter’s levels.

Europe & Australia: The segment’s revenues declined 9% to $454 million due to reduced volumes and unfavorable currency rates, partially countered by gains from net price realization and mix. Further, sales declined 5% year over year on an organic basis. The downside in sales was caused by tough operating environment in France, weak trends in ice cream and issues in merchandising phasing.

Asia & Latin America: Revenues declined almost 10% from the year-ago quarter’s levels to $360 million. The downtick was caused by adverse impacts of divestitures in fiscal 2019, reduced volumes and unfavorable currency movements. These were partially compensated by gains from net price realization and mix. Further, sales declined 3% on an organic basis due to lower inventory levels in Brazil, distribution network alterations in India and reduced volumes in China.

Pet Segment: Revenues came in at $368 million, up 7% year over year on the back of volume growth as well as favorable net price realization and mix impacts.

Other Financial Aspects

The company ended the quarter with cash and cash equivalents of $504.8 million, long-term debt of $11,619.8 million and total shareholder equity of $7,382.8 million.

General Mills generated $572.1 million as net cash from operating activities in the first quarter. During the quarter, the company made capital investments worth $70 million and paid dividends of nearly $298 million.

Other Developments

Constant-currency sales from joint ventures of Cereal Partners Worldwide increased 2% in the first quarter. At Haagen-Dazs Japan, sales rose 6% at cc from the prior-year quarter’s tally.

Fiscal 2020 Guidance

Management is on track with innovations as well as brand and capability-building initiatives. These are likely to enhance revenue opportunities and boost performance of weaker segments.  Further, the company strives to enhance efficiencies to drive margins and reduce leverage.

That said, General Mills reiterated its guidance for fiscal 2020. Management expects organic sales to improve 1-2%. Moreover, net sales are expected to rise 1 percentage point on the back of gains from divestitures, favorable currency translations and contributions from the 53rd week in the fiscal.

Adjusted operating profit (on cc basis) is expected to improve 2-4% from $2.86 billion delivered in fiscal 2019. Also, the company envisions adjusted earnings per share (EPS) growth (at cc) in the range of 3-5% year on year. Currency translation impacts are expected to remain irrelevant on adjusted operating profit and the bottom line.

Additionally, the company estimates free cash flow conversion of minimum 95% of adjusted after-tax earnings.

Price Performance

This Zacks Rank #3 (Hold) company’s shares have advanced 5.9% in the past three months compared with the industry’s 7.1% rise.

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