Will General Mills (GIS) Witness Improved Margins In Q2?

General Mills Inc. (NYSE:GIS) is set to report second-quarter fiscal 2018 results on Dec 20, before market open. It isn’t unknown that seismic shift in the U.S. food industry is creating hurdles for food behemoths such as General Mills, Kellogg Company (NYSE:K) , Mondelez International, Inc. (NASDAQ:MDLZ) , The Kraft Heinz Company (NYSE:K) and others, making it harder for legacy brands to improve sales. Although General Mills expects fiscal second quarter to register improvement in sales, we believe that the company needs time to be back in the positive territory (Read more: Will Soft Volume Weigh on General Mills’ Q2 Sales?).

Let’s take a look at how the company's margin is shaping up for this earnings season.

The company is currently taking a number of initiatives focused on improving operational efficiency to generate cost savings and support its key growth strategies. General Mills is on track to reduce its COGS (cost of goods sold) through its Holistic Margin Management (HMM) program that has helped it boost margins despite lower volume.

By fiscal 2018, the company expects to achieve cost savings through increased efficiency, reduced complexity through SKU optimization, supply chain optimization and continued expansion of zero-based budgeting across the business, which will result in accelerated margin expansion.

Buoyed on the above-mentioned initiatives, General Mills was successful in reporting higher margins until the first quarter of its fiscal 2018. Despite having profound strategic plans, General Mills’ adjusted gross margin contracted 230 basis points (bps), while its adjusted operating margin plunged 210 bps year over year in its last reported quarter. The downside was mainly due to continued decline in volumes, higher input costs on imported products, increase in advertising media expenses, and unfavorable mix that offset the benefits of its cost-saving plan.

For the to-be-reported quarter, the company expects the factors to turn more favorable. Primarily, General Mills anticipates its volume to improve, banking on innovation in brand building. Hence, the rate decline of the company’s adjusted operating margin is expected to lessen in the second quarter.

The company expects its margin headwinds to subside gradually during the second half of fiscal 2018. Also, it expects to generate higher cost savings during the period, driving its margins and thereby profit.

Overall, this Zacks Rank #4 (Sell) company has plans of delivering approximately $390 million in supply chain productivity savings in fiscal 2018 through its ongoing HMM efforts that will more than offset input cost inflation of 3%. General Mills also expects to deliver about $160 million in incremental savings from other restructuring and cost-reduction initiatives, which equates to approximately $700 million in aggregate cost savings by fiscal 2018.

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