Weak Volumes Hurt General Mills' Earnings, Revs - Analyst Blog

For the second quarter in a row, General Mills Inc. GIS missed the Zacks Consensus Estimate for both revenues and sales in the third-quarter of fiscal 2014.

Third-quarter adjusted earnings per share declined 6.1% year on year to 62 cents per share. The quarterly earnings also missed the Zacks Consensus Estimate by a penny. Both revenues and margins were weak in the quarter. Low volumes globally due to severe weather conditions, slowdown in food industry trends, higher consumer marketing spending and currency headwinds hurt results in the quarter.

In fact, a shortened holiday season and severe winter have been affecting sales performance across the U.S. retail food industry for the past three months.

Revenues and Margins

Total revenue of the global consumer food company declined 1% year over year to $4.38 billion and missed the Zacks Consensus Estimate of $4.431 billion. Weak volumes in the U.S. retail and foodservice business overshadowed decent international sales performance.

Price/mix added 1% to revenues, same as in the first two quarters of the year. Volumes declined 1%, which compared unfavorably with the flat growth in the first quarter. Foreign exchange dragged revenues by 1%.

Adjusted gross margin declined 80 basis points (bps) to 34.1% due to lower volumes and higher input costs, mainly dairy products. Despite a 3% decrease in advertising costs, adjusted operating margin declined 70 bps to 14.8% in the quarter due to weak gross margins and a 5% increase in consumer marketing spending.

Segment Performance

U.S. Retail: Revenues from the U.S. Retail segment declined 1.7% year over year to $2.62 billion in the quarter due to 1% decline in both volume and price/mix.

Despite lower advertising expenses, segment operating profit declined 10.5% to $516.6 million due to higher dairy costs and increased marketing and merchandising expenses to support the U.S. yogurt business.

General Mills' U.S. yogurt business has been sluggish for several quarters as increased sales prices in response to dairy cost inflation reduced the competitiveness of its products. In fiscal 2013, yogurt sales declined 5%, missing management's expectation to witness growth. The company is trying to reinvigorate the category through the launch of new yogurt items, increased marketing support and expanded distribution of Yoplait Greek blended yogurt.

International: Revenues in the International segment grew 2.0% year over year to $1.32 billion due to price/mix gains. While price/mix added 8% to net sales growth, volume declined 1%. Foreign exchange had an unfavorable impact of 5% on net sales.

On a constant currency basis, international revenues grew 7% in the quarter. Constant currency revenues grew 17% in Latin America led by Brazil, 14% in Asia Pacific driven by China and 2% each in Canada and Europe.

Excluding Venezuelan currency devaluation, segment operating profit grew 0.5% to $110.5 million due to price/mix gains.

Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment's quarterly revenues declined 7.1% to $436.5 million due to lower volumes. Volumes declined 3% due to severe weather conditions while price/mix went down 4%. Segment operating profit declined 17.2% year over year to $62.4 million due to weak top line.

Fiscal 2014 Outlook Retained

Fiscal 2014 earnings are still expected to grow at a high single-digit rate in the range of $2.87 to $2.90. In the fourth quarter, management expects lower input costs and taxes coupled with decreased share count to lead to double-digit growth in adjusted earnings per share.

Other Stocks to Consider

General Mills carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the food industry include J&J Snack Foods Corp. JJSF, Diamond Foods, Inc. DMND and Inventure Foods, Inc. SNAK. All the three companies carry a Zacks Rank #2 (Buy).