General Mills Beats, Raises - Analyst Blog

General Mills Inc. (GIS) reported strong results for the second quarter of fiscal 2010, with earnings of $1.54 per share. Earnings were well above the Zacks Consensus Estimate of $1.45 and up 13.3% year-over-year. Profits were driven by lower commodity costs and strong demand for the company’s products.

Net sales for the quarter grew marginally – 1.7% year-over-year -- attributable to a 16% decline in the Bakeries and Foodservice segment. In addition, divestiture had a 2% unfavorable impact on the top line and pound volume was flat year-over-year. This was partially offset by 3.8% growth in the U.S. Retail segment, 7.1% growth in the International segment and a 1% positive impact from foreign currency.

Segment wise: the U.S. Retail segment posted a 3.8% increase, reflecting strong growth in the Big G cereals, Meals division, Pillsbury, Yoplait yogurt and Snacks categories. Pound volume contributed 2% to top-line growth.

The International segment reported a 7.1% increase in revenues, primarily due to foreign currency translations. In addition, net price realization and mix contributed 3% to the top line. However, pound volumes were flat year-over-year.

The Bakeries and Foodservice segment reflected the absence of divested product lines and the impact of indexed bakery flour prices that were below year-ago levels. Additionally, pound volume also reduced net sales by 10%.

Gross margins for the quarter expanded a robust 1242 basis points (bps) to 42.8% versus 30.4% in the comparable prior-year quarter. The increase was primarily attributable to the implementation of the holistic margin management approach by the company. This helped to improve the operating performance in the company’s manufacturing facilities.

Despite higher advertising expenses, the operating margin for the quarter expanded 618 bps to 21.6% from 15.4% in the prior-year quarter.

Cash flow from operating activities for the first half of fiscal 2010 increased a strong 171% to $987 million, driven by efficient working capital management and strong earnings growth. Capital expenditures for the first six months of fiscal 2010 were $258 million. The company has a debt-to-capitalization ratio of 47%.

Given the company’s strong balance sheet, the Board of Directors declared a 4.3% increase in the quarterly dividend and a 12% increase in annual dividend. Therefore, the quarterly dividend was raised to 49 cents and the annual dividend was raised to $1.92 from 47 cents and $1.72 respectively.

Based on the results for the second quarter, management raised its guidance for fiscal 2010. Annual earnings are now expected in the range of $4.52 to $4.57 per share. Previous guidance was $4.40 to $4.45, reflecting a 3% increase.

For the rest of the year, the company intends to primarily focus on a business model that uses supply chain productivity, sales mix management and other cost savings initiatives in order to protect its margins from the pressure of rising commodity costs. Management believes that this measure will help to limit price increases and allows it to direct significant resources back into the business. This reinvestment will fuel strong sales growth, offering consumers high quality, nutritious and convenient foods at good values for the money.
Read the full analyst report on "GIS"
Zacks Investment Research