General Mills Inc.'s second-quarter financial performance fell short of Wall Street's expectations as its U.S. sales lagged across the board.
Cereal sales sank after a comeback during the first quarter. The yogurt business was down, reversing a few quarters of momentum. Even sales of snacks — one of General Mills' strongest businesses — fell a bit.
"U.S. retail trends do not seem to be improving," Alexia Howard, a stock analyst at Bernstein Research, wrote in a report Thursday.
General Mills is trying to turn that situation around by investing in its brands and buying new ones, while still growing profits — a goal being met through cost reductions. It's "a major balancing act," Howard wrote.
Golden Valley-based General Mills Thursday reported second-quarter net earnings of $530 million, or 87 cents a share, up from $346 million, or 58 cents, a year ago.
Adjusted for one-time charges and benefits, profits amounted to 82 cents per share, up 2 percent over a year ago. That's a penny below the consensus profit forecast of stock analysts polled by Thomson Reuters, though in line with analysts' estimates from Zacks Investment Research.
General Mills, maker of everything from Cheerios cereal to Nature Valley granola bars, posted sales of $4.4 billion for the second quarter ending Nov. 29, 2 percent below a year ago in constant currency and 4 percent short of analysts' projections from Thomson Reuters.
General Mills stock closed Thursday at $57.23, down $1.96 or 3.3 percent.
In the company's U.S. retail division, sales totaled $2.76 billion, down 4 percent. Acquisitions and divestitures, notably Mills' sale of its Green Giant brand for $765 million, accounted for 1 percent of that reduction in U.S. sales.
But the rest of the drop comes from soft volume, a nagging problem for General Mills and the entire packaged-food industry as some consumers are moving away from processed food.
That's not the only problem. Second-quarter sales were hurt by a decline in merchandising at supermarket chains, particularly at General Mills' largest customer, Wal-Mart, which accounts for about 30 percent of its U.S. retail sales.
"The story for us in the second quarter was that our merchandising didn't have the impact we had expected it to have," General Mills CEO Ken Powell told analysts in a conference call.
Merchandising refers to in-store promotional displays for packaged food products. When a retailer reduces merchandising for a product, it can cut back on inventory, too, hurting a packaged-food company's sales.
General Mills' largest U.S. retail business, Big G cereals, saw sales fall 5 percent during the quarter over a year ago, and the merchandising shortfall played a key role, Powell told the Star Tribune.
Sales in all of the company's major U.S. retail divisions fell, including snacks, which fell 1 percent.
The weakness in that category stemmed from General Mills' fruit snacks, not its Nature Valley brand, Don Mulligan, chief financial officer, said in an interview with the Star Tribune.
Yogurt, another major U.S. division, saw sales fall 4 percent over a year ago, as General Mills' Yoplait brand struggled in a more competitive and promotional environment.
Powell told the Star Tribune he expects that sales trends will improve and merchandising will recover as new products are launched in the next few months. Those new products include Nature Valley cereals featuring oat clusters, a yogurt line under the Annie's brand and an oatmeal version of Yoplait Plenti Greek yogurt.
Plus, two big offensives — gluten-free Cheerios and the removal of artificial ingredients from all cereals — are well underway.
"While management's plans have merit, [General Mills] is still a stock at an above average price for below-trend growth and returns," Jonathan Feeney, an analyst at Athlos Research, wrote in a report Thursday.
General Mills' international division was hit hard by negative currency effects, but it was otherwise a bright spot during the second quarter.
The division's revenue declined 12 percent to $1.16 billion, but when adjusted for currency fluctuations, international sales were up 3 percent and were particularly strong in Latin America.
General Mills on Thursday also revised downward its 2016 sales growth targets to reflect the sale of Green Giant and increased its estimate of cumulated expected cost savings from $400 million to $450 million by 2017. The company has undertaken a number of cost reduction programs in the last 18 months that have led to a few thousand layoffs.
Mike Hughlett • 612-673-7003
