General Mills (GIS) Beats On Q1 Earnings; 2017 View Intact

General Mills, Inc. (NYSE:GIS) reported fiscal first-quarter 2017 adjusted earnings per share of 78 cents that beat the Zacks Consensus Estimate of 76 cents by 2.6%. However, earnings declined 1% year over year. On a constant currency basis, earnings also dipped 1% due to lower year-over-year sales.

Adjusted earnings exclude divesture losses, restructuring as well as project-related expenses and mark-to-market valuation effects. Including these items, reported earnings were 67 cents per share, down 3% year over year.

Sales Remain Weak

Total revenue declined 7.1% year over year to $3.9 billion owing to the Green Giant divesture, currency headwinds and lower organic sales. Sales were in line with the Zacks Consensus Estimate of $3.9 billion. Sales were weak in the core U.S. Retail segment as well as for the other segments.

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

Price/mix improved 2 percentage points whereas volumes declined 8 percentage points. Foreign exchange headwinds dragged revenues by 1 percentage point.

Margins Decline

As expected, adjusted gross margin declined 30 basis points (bps) to 37.4% as lower pricing and higher input cost inflation offset savings from cost reduction activities.

Adjusted operating profit slumped 6% to $646 million. Adjusted operating margin however increased 80 bps to 19.2%.

Segment Performance

U.S. Retail: Revenues from the U.S. Retail segment declined 8% year over year to $2.33 billion due to lower volumes. Volumes declined 12 percentage points, while price/mix added 4 percentage points to revenues.

Sales and profits in the U.S. Retail segment, accounting for 60% of its 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 (NYSE:K) and Mondelez International, Inc. (NASDAQ:MDLZ) , has been struggling due to the shift in consumer preference toward natural and organic food.

International: Revenues in the International segment declined 6% year over year to $1.13 billion because of headwinds from currency fluctuations. Foreign exchange had a 4 percentage points unfavorable impact on net sales.

While volumes declined 4 percentage points and foreign exchange headwinds dragged revenues by another 4 percentage points, price/mix added 2 percentage points to revenues in the quarter.

Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment’s revenues tumbled 7% to $446 million owing to market index pricing on bakery flour, partially neutralized by increases for the yogurt, biscuits, and cereal platforms.

Fiscal 2017 Outlook Maintained

Organically, year-over-year sales growth is anticipated in the range of flat to down 2% in fiscal 2017.

Adjusted earnings per share (constant currency) are expected to grow in a range of 6-8% from the fiscal 2016 level of $2.92 per share.

Currency headwinds are expected to hurt earnings by 2 cents.

Total segment operating profit growth is estimated to increase in the range of 6–8% on a constant currency basis. Adjusted operating profit margin is expected to increase by approximately 150 bps.

In fiscal 2018, the company expects modest organic net sales growth and a low double-digit increase in adjusted constant-currency EPS.

The company has maintained its guidance for cost savings initiatives. It now projects to generate savings of $600 million by fiscal 2018, higher than $500 million expected previously.

Additionally, it expects an adjusted operating profit margin of 20% by fiscal 2018, up 400 bps over fiscal 2015 levels.

General Mills carries a Zacks Rank #4 (Sell).

Stock to Consider

A better-ranked stock in the consumer staples sector is Omega Protein Corporation (NYSE:OME) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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