General Mills keeps wringing out costs and boosting efficiency, a recipe that’s working in the short term, as the packaged food giant topped Wall Street’s third quarter profit expectations Wednesday.
But General Mills’ U.S. sales continued to languish during the quarter — Yoplait yogurt got particularly shellacked — a portentous trend. Sustained earnings growth demands improved sales, yet General Mills and other packaged food makers seemed to be caught in a consumer migration away from some processed foods.
“You hope that product innovation gets better and marketing kicks in and consumers start spending more,” said Jack Russo, a stock analyst at Edward Jones.
General Mills says sales should improve next quarter, and that cereal, a key category, has stabilized. “We are very focused on revenue growth and in a number of areas we are seeing growth,” Ken Powell, General Mills CEO, said in an interview with the Star Tribune.
General Mills Wednesday recorded net profits of $361.7 million or 59 cents per share for the quarter ending Feb. 28, up from 56 cents per share from a year ago. When adjusted for one-time charges and gains, Mills’ second quarter profits were 65 cents per share, down from 70 cents a year ago.
Stock analysts polled by Thomson Reuters were on average expecting adjusted profits of 62 cents per share.
General Mills’ net sales were $4 billion, below the $4.08 billion forecast by analysts. Sales were down 8 percent from a year ago, although that figure includes a four percentage point drop from negative foreign currency swings and a 3 percent decline due to the company’s sale of Green Giant.
General Mills reaffirmed its full-year earnings target. Its stock closed Wednesday at $61.01, up 22 cents.
General Mills’ U.S. retail business, its largest segment, saw third quarter sales fall 7 percent to $2.48 billion while operating profits tallied $518 million — in line with a year ago. Factoring out the Green Giant vegetable business, which General Mills sold last year, Mills’ U.S. sales still fell by 2 percent during the third quarter.
“When you look at the base trends, they are eroding pretty hard and pretty fast for your U.S. portfolio,” one stock analyst told General Mills executives in a conference call Wednesday.
Yoplait was the biggest culprit during the third quarter, its sales sinking 10 percent over the same time a year ago. It was one of Yoplait’s worst quarterly performances in the past few years.
The yogurt business has gotten more competitive, and General Mills fingered low dairy prices for sparking a price war.
“With dairy prices at a 20-year low, we are seeing a higher level of discounting,” Powell told the Star Tribune. “We have lost some revenue, but the key here is to not chase after unprofitable [business].”
With the lost sales, General Mills also lost two to three percentage points of U.S. yogurt market share from December through February, according to a recent report by Alexia Howard, a stock analyst at Sanford Bernstein.
All of General Mills’ five major U.S. businesses saw sales declines, including cereal and snacks, which were each off 2 percent over the same time last year.
General Mills was once again hurt in the third quarter by a decline in packaged food merchandising at Wal-Mart, its largest customer, which accounts for about 30 percent of Mills’ U.S. retail sales. Outside of Wal-Mart woes, though, cereal trends are improving, according to the company.
Sales of gluten-free Cheerios are up 2 percent since the cereal was launched last year, Jeff Harmening, head of General Mills retail sales, told stock analysts. And the seven cereals which General Mills has recently reformulated — ditching artificial flavors and colors — have also seen healthy sales boosts.
“The good news for General Mills, and Kellogg as well, is the cereal category has stabilized,” Russo said. The two companies dominate the U.S. cereal business, which has seen weak sales over the past few years.
General Mills’ third-quarter international sales declined 13 percent to $1.07 billion, due to negative currency fluctuations. On a constant-currency basis, international sales matched those of a year ago. International segment operating profit was down 35 percent to $70 million, a drop driven by negative currency swings.