General Mills (GIS) Beats Q4 Earnings & Sales; Ups Dividend

General Mills, Inc. (NYSE:GIS) reported better-than-expected fourth-quarter fiscal 2016 results, beating the Zacks Consensus Estimate for both earnings and sales.

The food manufacturer raised its quarterly dividend by 4% and also upped its cost saving target from its various restructuring projects. Shares rose almost 1.8% in pre-market trading.

Earnings Beat

Fiscal Fourth-quarter adjusted earnings per share of 66 cents beat the Zacks Consensus Estimate of 60 cents by 10%. However, earnings declined 12% year over year. A stronger U.S. dollar hurt earnings by 1%. On a constant currency basis, earnings declined 11% as cost savings from restructuring activities and a lower tax rate were offset by lower year-over-year sales and higher input costs.

Adjusted earnings exclude divesture losses, restructuring, and project-related expenses and mark-to-market valuation effects. Including these items, reported earnings were 62 cents per share, up 107% year over year.

Sales Remain Weak

Total revenue declined 8.6% year over year to $3.93 billion due to the Green Giant divesture, currency headwinds and difficult year-over-year comparisons. The year-ago comparable quarter gained from an extra week.

General Mills divested its Green Giant and Le Sueur brands of frozen and shelf-stable vegetables to food manufacturer, B&G Foods, Inc. (NYSE:BGS) , in November last year.

Foreign exchange headwinds dragged revenues by 1% while the one less week and acquisitions/divestures hurt sales by a combined 9%. In constant currency terms, sales declined 8%.

Organically, excluding currency and acquisitions/divesture, sales rose 1% - in line with management’s expectation of turning positive. The top line beat the Zacks Consensus Estimate of $3.84 billion by 2.3%.

Continued weak sales in the core U.S. Retail segment was partially offset by an improved performance in the International segment.

Price/mix declined 1%, compared to a gain of 1% in the previous quarter. Volumes declined 7%, more than the 5% drop in the last quarter.

Margins Decline

As expected, adjusted gross margin declined 130 basis points (bps) to 34.4% as lower pricing and higher input cost inflation offset savings from cost reduction activities.

Adjusted operating profit declined 20.3% to $573.5 million. Adjusted operating margin declined 210 bps to 14.6% due to lower gross margins.

The adjusted effective tax rate was 21.6%, significantly less than 28.4% a year ago.

Segment Performance

U.S. Retail: Revenues from the U.S. Retail segment declined 12% year over year to $2.2 billion due to lower volumes. Volumes declined 15% while the one less week and acquisitions/divestures had a 10% negative impact on sales. Price/mix added 3% 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.

In fiscal 2016, increased competitive activity in yogurt and lower merchandising levels in cereals and snacks hurt results in the segment.

International: Revenues in the International segment declined 1% year over year to $1.2 billion because of headwinds from currency fluctuations. Foreign exchange had a 4% unfavorable impact on net sales.

On a constant currency basis, international sales rose 3% due to higher volumes. While volumes rose 9%, price/mix hurt sales by 6% in the quarter. The one less week and the net impact of acquisitions and divestitures hurt sales by 7%.

Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment’s revenues declined 8% to $487 million due to lower volumes and an unfavorable impact of one less week.

Fiscal 2016 Results

Adjusted earnings per share of $2.92 in fiscal 2016 beat the Zacks Consensus Estimate of $2.86 by 2.1%. Earnings increased 2% year over year. On a constant currency basis, earnings increased 5%, in line with the guidance of growth in a low single-digit rate.

Net sales declined 6% to $16.56 billion in fiscal 2016, marginally beating the Zacks Consensus Estimate of $16.47 billion by 0.5%. On a constant currency basis, sales decreased 2%, in line with management’s expectations of a decline in a low single-digit rate year over year.

Cost Saving Target Upped

General Mills is currently pursuing several multi-year restructuring initiatives - Projects Century, Catalyst, and Compass – which include job cuts and factory closings, to generate cost savings and support its key growth strategies.

The company raised its guidance for cost savings from these projects as well as administrative cost reductions from zero-based budgeting. It now expects to generate savings of $600 million by fiscal 2018, higher than $500 million expected previously.

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

Dividend Upped

The board of directors announced a 4% increase in the quarterly dividend from 46 cents to 48 cents per share, payable Aug 1, 2016, to its shareholders of record as of Jul 11, 2016. This adds up to an annual dividend of $1.92, representing a dividend yield of almost 3%.

Fiscal 2017 Outlook Issued

Organically, year-over-year sales growth is expected 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. This translates into $3.09-$3.15 per share, which is above the current Zacks Consensus Estimate of $3.05 per share.

Currency headwinds are expected to hurt earnings by 1%-2%. However, this doesn't take fluctuations to the British Pound into account

Total segment operating profit growth is expected 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.

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