Slump in U.S. Sales Weighs on General Mills’ Results

Results also reflect unfavorable impact of foreign exchange fluctuations

Source: Company's Website
Source: Company’s Website

Food giant General Mills Inc. (NYSE: GIS) announced its Q4 FY16 and full year FY16 financial results on June 29th, 2016. General Mills manufactures and markets branded consumer foods in the U.S. and international markets such as Cheerios, Annie’s, Yoplait, Nature Valley, Fiber One, Häagen-Dazs, Betty Crocker, Pillsbury, Old El Paso, Wanchai Ferry, and Yoki. It also supplies branded and unbranded food products to the foodservice and commercial baking industries. The Company operates in three segments: U.S. Retail, International, and Convenience Stores and Foodservice. The Minneapolis, Minnesota-based company sells its products directly as well as through supermarket chains, foodservice distributors, and convenience stores. Read more about the General Mills’ financial results below.

Q4 FY16 financial highlights

General Mills’ Q4 FY16 net sales declined 8.6% to $3.9 billion, versus $4.30 billion in the prior year quarter, making it the fourth straight quarter of decline. These results reflect the unfavorable impact of foreign exchange fluctuations, the sale of North American Green Giant, and one less week compared to FY15. On a constant-currency basis, net sales decreased 8%.

The Company’s gross margin declined 20 basis points during Q4 FY16 owing to higher input cost inflation during Q4 FY16, while adjusted gross margin declined 130 basis points. On the other hand, operating profit jumped 26% to $532 million, while total segment operating profit decreased 18% to $654 million. Net earnings in Q4 FY16 totaled $380 million and diluted EPS came in at $0.62 compared to $0.30 in the year-ago quarter. Adjusted diluted EPS tumbled 12% to $0.66 in Q4 FY16 from $0.75 a year ago. On a constant-currency basis, Q4 FY16 adjusted diluted EPS declined 11%.

U.S. Retail segment

General Mills’ Q4 FY16 net sales for the U.S. Retail segment declined 12% to $2.2 billion owing to the unfavorable impact of foreign exchange fluctuations as well as the net impact of acquisitions and divestitures. This segment’s operating profit nosedived 24% to $430 million, as compared to the year-ago results.

International segment

General Mills’ Q4 FY16 net sales for the International segment declined by 1% to $1.2 billion compared to the prior year owing to foreign currency exchange effects. On a constant-currency basis, net sales increased 3%. Segment operating profit dived 12% to $118 million, and fell 7% on a constant-currency basis.

Convenience Stores and Foodservice segment

The Company’s Q4 FY16 net sales for the Convenience Stores and Foodservice segment declined 8% to $487 million owing to lower pound volume and the impact of one less week. This segment’s operating profit rose 5% to $106 million during the quarter under review.

Earnings from joint ventures

The Company’s Q4 FY16 after-tax earnings from joint ventures jumped 29% to $23 million as reported and up 28% on a constant-currency basis.

FY16 financial highlights

General Mills’ full year FY16 net sales fell 6% to $16.6 billion owing to reduced pound volume, negative impact of foreign currency exchange, one less week compared to FY15, and the net impact of acquisitions and divestitures. On the other hand, the Company’s gross margin increased 150 basis points, reflecting the benefit of cost savings initiatives. Adjusted gross margin, which excludes mark-to-market effects and certain other items affecting comparability, increased 90 basis points. Selling, general, and administrative expenses decreased 6% due to cost-reduction initiatives during FY16. Overall segmental operating profit declined 1% to $3.0 billion, but increased 1% on a constant-currency basis during the year.

The Company’s adjusted operating profit margin increased 90 basis points to 16.8% of net sales. General Mills recorded a gain of $148 million from the divestiture of the Green Giant business in November 2015. As a result, FY16 net earnings attributable to General Mills totaled $1.7 billion, and diluted EPS amounted to $2.77. Adjusted diluted EPS rose 2% to $2.92 in FY16 from $2.86 earned in FY15. On a constant-currency basis, adjusted diluted EPS grew 5%.

U.S. Retail segment

General Mills’ FY16 net sales for the U.S. Retail segment declined 5% to $10.0 billion owing to reduced pound volume, one less week compared to FY15, and the net impact of acquisitions and divestitures. This segment’s operating profit rose 1% to $2.2 billion.

International segment

General Mills’ FY16 net sales for the International business segment declined 10% to $4.6 billion owing to the negative impact of foreign currency exchange. On a constant-currency basis, net sales increased 3%. This segment’s operating profit dived 15% to $442 million, and declined 3% on a constant-currency basis.

Convenience Stores and Foodservice segment

General Mills’ FY16 net sales for the Convenience Stores and Foodservice segment were 4% lower at $1.9 billion versus prior-year results, owing to reduced pound volume and lower index pricing on bakery flour. This segment’s operating profit increased 7% to $379 million as compared to the previous year.

Earnings from joint ventures

The Company’s combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ) joint ventures grew 5% to $88 million, reflecting favorable input costs for both businesses. On a constant-currency basis, after-tax earnings from joint ventures increased 12%. Constant-currency net sales for CPW remained flat as compared to year-ago period, while that for HDJ grew 5%.

FY17 outlook

General Mills forecasts FY17 organic net sales growth to range between flat to down 2% compared to FY16. However, the Company expects to deliver a 6% to 8% growth in constant-currency total segment operating profit. FY17 adjusted operating profit margin is expected to increase by approximately 150 basis points, with constant-currency adjusted diluted EPS growing 6% to 8% from earnings of $2.92 in FY16.

Other highlights

General Mills has appointed company veteran, Jeffrey L. Harmening, as the President and Chief Operating Officer responsible for global operations, as per a company release on June 23rd, 2016.

Harmening will continue to report to Chairman and CEO Ken Powell.

On a negative note, General Mills has suffered a dent to its image after it had to recall 10 million pounds of its Gold Medal, Signature Kitchens, and Wondra flour brands on June 1st, 2016, in response to an ongoing outbreak of E. coli bacteria-related illnesses. The Company is assisting federal health officials ascertain the likely source of dozens of illnesses in 20 states. The different brands of flour recalled are produced at the company’s Kansas City, Missouri, plant.

Stock Performance

G2General Mills’ stock stood at $71.94, up 0.87%, at the close on Friday, July 1st, 2016, having vacillated between an intraday high of $72.19 and a low of $70.86 during the session. The stock’s trading volume was at 6,074,787 for the day. The Company’s market cap was at $43.04 billion as of Friday’s close.

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