General Mills Misses Estimates - Analyst Blog

General Mills (GIS) reported results for the second quarter of fiscal 2011. For the quarter, adjusted earnings decreased 1.3% to 76 cents a share compared with 77 cents in the year-ago period. The quarterly EPS was also below the Zacks Consensus Estimate of 78 cents by 2.6%. Profits were impacted by higher commodity costs and higher levels of price promotion.

Management reiterated its fiscal 2011 earnings in the range of $2.46 - $2.48 a share. Excluding mark-to-market effects and the tax charge related to health care legislation, the fiscal 2011 earnings guidance reflects an annual growth of 7% – 8%.

Revenues and Margins

Total revenue for the reported quarter grew only marginally by 1% year over year to $4.07 billion. The quarter experienced volume growth, which was partially offset by reduced price realization and unfavorable mix. Revenues were also below the Zacks Consensus Estimate of $4.11 billion.

General Mills gross margin contracted 265 basis points (bps) to 40.2% in the quarter compared with the year-ago period, due to higher commodity costs.

Segments

Revenue for the U.S. Retail segment were almost flat year-over-year declining negligibly by 0.3% to $2.85 million in the quarter, as reduced price realization and unfavorable mix fully offset the benefit of volume growth.

Revenue at the International segment grew marginally by 4.0% year-over-year in the quarter to $748.8 million, reflecting an 8% volume (measured in pounds) growth, which was partially offset by a 3% unfavorable currency translation and 1% from net price realization and mix.

Compared with the year-ago period, the Bakeries and Foodservice segment revenue improved marginally by 3.0% to $468 million in second quarter 2011, demonstrating a 4% increase in net price realization and mix, which was partially offset by 1% decline in volume (measured in pounds).

In the quarter, operating profit at International segment grew 25%. However, operating profit at the U.S. Retail and Bakeries and Foodservice segment dropped 4% and 13%, respectively. Total segment operating profit slipped 6.4% year-over-year to $823 million in the quarter.

Balance Sheet and Share Repurchase

The company exited the quarter with operating cash flow of $599.5 million which was down 39.3% year over year from $987.1 million, primarily due to higher working capital requirements. During the second quarter, General Mills repurchased 26 million shares of its common stock.

Based in Minneapolis, General Mills manufactures and markets branded consumer foods worldwide. General Mills shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation. Our long-term recommendation for the stock remains Neutral.