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General Mills (NYSE:GIS) is among the leading food companies of the world, with annual sales of $18 billion. Recently, the company reported somewhat disappointing financial performance for Q2FY2014, mainly due to rising input costs and sluggish consumer spending in the U.S. However, I believe the company has been taking the right measures to increase its international market presence and expand its product range, which will fuel its future earnings growth. Also, the company offers a safe dividend yield of 3%. Therefore, despite short term difficulties, I believe GIS is a good long term buy.

Financial Performance Q2FY2014
Recently, GIS reported its 2QFY2014 financial performance. GIS' adjusted EPS for the quarter came out to be $0.83, down 3.5% year-on-year, missing consensus estimates of $0.88. Earnings for the quarter were adversely affected by input cost inflation and weak U.S. retail sales trends. Reported sales for the quarter were $4.88 billion, flat as compared to the corresponding period of last year. However, the company did experience an organic growth rate of 1% in the recent quarter. In the recent quarter, the company experienced flat sales volume, whereas pricing had a 1% positive impact on its total sales.

The company's U.S. Retail segment reported weak results for the recent quarter. Net sales for the U.S. Retail segment decreased 0.7% and operating profit declined by 6% year-on-year. The segment's performance was adversely affected by a 2% drop in sales volume, partially offset by a 1% price increase. The company's International segment remains solid, as it experienced an organic sales growth of 5% year-on-year. Also, its International segment's operating profit increased by 10% year-on-year in the recent quarter. Convenience Stores and Foodservices segment, which contributes nearly 10% towards the company's total sales, also experienced a drop of 1.7% in the net quarterly sales and the segment's operating profit declined by 10% year-on-year.

The company's financial performance in the recent quarter was adversely affected by rising input costs, which also took a toll on margins. Also, as the retail industry remains competitive, the company was unable to expand its sales volume and increase prices to grow revenues. The following table shows the dropping margins for GIS in the recent quarter.

Q2FY2013

Q2FY2014

Gross Margin

36.7%

35.7%

Operating Margin

18.1%

17.4%

Net Margin

11.8%

11%

Source: Quarterly Company Release

Stock Price Drivers
Another reason, other than intense competition and a weak retail environment, for the weak sales volume in the recent quarter could have been a 3% drop in advertisement spending by GIS in the recent quarter. I believe that as the industry environment remains competitive, GIS needs to ramp up its advertisement and marketing (A&M) spending in order to grow its top line numbers. Also, GIS currently has lower A&M spending of 5.7% as a percentage of total sales, as compared to its competitors Kellogg's (NYSE:K) and The Hershey Company's (NYSE:HSY) A&M spending of 8.2% and 7.3%, respectively. The following table shows the advertisement and marketing spending as a percent of sales for GIS.

Q3FY2013

Q4FY2013

Q1FY2014

Q2FY2014

A&M/Sales

5.5%

5.4%

5.9%

5.7%

Source: Quarterly Company Releases

Significant and growing international market exposure is an important reason, due to which I am bullish on the stock. Currently, approximately 30% of GIS' total sales are derived from international markets. International markets offer impressive growth opportunities and I believe they will offset the weakness in the U.S. Retail segment for the company. GIS has been aggressively working to expand its international market footprint, by undertaking strategic acquisitions, which will provide for its sales and earnings growth in the future. The table below shows the robust increase in international sales for GIS in the last four quarters.

Q3FY2013

Q4FY2013

Q1FY2014

Q2FY2014

% Increase in International Sales

24%

26%

22%

3.5%

Source: Quarterly Company Releases

Product innovation efforts also remain an important growth driver for the company in the future. GIS has been aggressively working to come up with new products to keep up with changing consumer tastes and preferences. The company expects to launch 50 new products in the second half of FY2014, which will drive sales volume growth for GIS.

Also, an expected improvement in the cost environment will help the company improve its margins and bottom line results in the upcoming years. During the recent earnings release, the company indicated that the input cost environment is expected to improve in Q3FY2013 and onwards. Therefore, I believe that as we move forward, the company will be able to expand its margins and grow its earnings.

Risks
As the company has been expanding its international market exposure, strengthening of the dollar remains a threat to the company's financial performance. In the recent quarter, foreign currency movements had an adverse impact of 3% on the company's international segment's sales. Another area of concern for GIS is a drop in sales of yogurt. Yogurt sales comprise approximately 7.5% of the company's total sales. The company has been experiencing a weakness in the U.S. yogurt market. Yogurt shipments have been declining in recent times; however, the trend has been improving.

Q2FY2013

Q3FY2013

Q4FY2013

Q1FY2014

Q2FY2014

Mills' U.S. yogurt shipment growth

-5%

-4%

-1%

0%

-2%

Source: Quarterly Releases

Conclusion
Despite the ongoing weakness in the U.S. retail industry, which adversely affected the recent quarter's results, I believe the company is on track to deliver a healthy financial performance in the long term. The growing international market exposure and product innovation initiatives remain important growth drivers for GIS as we move forward. Also, the company offers a safe dividend yield of 3%, backed by its free cash flow yield of 6%. Moreover, analysts are projecting a robust growth rate of 7.8% per annum for the next five years. Due to the aforementioned factors, I believe GIS is a good long term investment option.

Source: Expected Future Growth Rate And Dividend Yield Make GIS A Buy