Anchored by the profitability of its U.S. retail food and food service businesses, General Mills Wednesday posted a strong increase in quarterly earnings that handily beat Wall Street forecasts.
The Golden Valley-based packaged foods giant also saw its burgeoning international segment grow sales by 24 percent, while overall revenue significantly topped forecasts.
Still, two core U.S. businesses, cereal and yogurt, posted sales declines again in the fiscal third quarter. And the company sounded a conservative note for its fourth quarter.
General Mills recorded fiscal third quarter net profits of $398.4 million or 60 cents per share, up from $391.5 million or 58 cents from a year ago. Adjusted for one-time items, the company’s earnings per share were 64 cents, compared with an average of 57 cents per share forecast by analysts polled by Thomson Reuters.
“It was a good beat — most of it was due to operations,” said Jack Russo, a stock analyst at Edward Jones.
About two-thirds of the firm’s higher-than-expected earnings came from factors like higher sales and better cost controls, while the rest stemmed from a lower tax rate and lower interest costs.
General Mills’ quarterly sales tallied $4.43 billion, up 7.5 percent from a year ago and above analysts’ average estimates of $4.36 billion. As measured in unit volume, third quarter sales were the best they’ve been in at least a year.
“We continue to see slow but steady improvement in the operating environment,” General Mills CEO Ken Powell said in a statement.
Investors reacted positively: General Mills stock closed at $47.61, up $1.19 or 2.6 percent.
Edward Aaron, an analyst at RBC Capital Markets, said in a report that General Mills’ revenues were notably strong, given that the firm has struggled to hit Wall Street’s sales estimates the past couple of years. “The magnitude of the revenue beat is noteworthy,” he wrote.
Despite the stong third quarter, the company raised its full-year profit guidance only modestly, Aaron wrote. General Mills upped its per-share profit guidance by a penny to a range of $2.66 to $2.68.
General Mills chief financial officer Don Mulligan said in an interview with the Star Tribune that the company expects to meet its sales and operating profit forecast for the fourth quarter. Still, fourth quarter profits are expected to decline on a year-over-year basis, as the company is facing a higher tax rate and higher costs, as well as a tough comparison to 2012’s fourth quarter.
General Mills’ U.S. retail business, its largest segment, saw sales rise 2 percent during the third quarter to $2.66 billion. Its operating profits increased 13 percent, the result of lower ingredient inflation and advertising expenses, combined with tight cost controls and stronger sales of products at “list” prices — rather than on promotion, Mulligan said.
Still, sales of cereal, General Mills’ largest U.S. business, were down 2 percent over a year ago, the third straight quarter of decline. But Powell told analysts cereal sales trends are improving.
Yoplait sales were down 4 percent from a year ago, better than the 10 percent and 5 percent declines respectively in General Mills’ first two quarters. The company has been hammered by its weakness in the rapidly growing Greek yogurt market.
However, General Mills Greek yogurt sales outpaced the Greek category generally during the third quarter. Its new Greek 100 product, a lower calorie Greek yogurt, has had a strong start, and the company expects first-year sales of $100 million, a healthy amount for a new food product.
General Mills’ food service business, which serves commercial customers like convenience stores, had a particularly strong quarter. Though its sales of $470 million were flat compared to a year ago, its operating profit rose 13 percent, partly due to lower manufacturing costs and increased grain merchandising earnings.
The food service segment’s profitability has steadily gained in recent years, and its profit margins are now just two to three percentage points below the company’s average. “There has been a very substantial improvement in that business,” Powell said in an interview with the Star Tribune.
General Mills international sales rose to $1.3 billion, including a 20 percentage point gain from new businesses, notably the 2012 acquisition of Brazilian food maker Yoki Alimentos.
But the international segment’s operating profit was flat over a year ago, due to a currency devaluation in Venezuela, which has forced U.S. firms doing business there to adjust their balance sheets. Without the devaluation, General Mills’ international profits were up 16 percent over a year ago.