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Summary

  • General Mills is moving to excel in the consumer sector with promising initiatives to grow earnings.
  • Earnings continue to grow despite drag on its sales base.
  • General Mills' efforts to lower costs will help improve the stock's performance.

General Mills Inc (NYSE:GIS), one of the largest packaged food companies, is widely spread around the globe. The company's top-line was challenged in the recent quarter due to input cost inflation and negative currency headwinds from international operations. GIS is constantly bringing in new and innovative products for both the U.S. and international segments to increase volumes and improve revenues. Furthermore, the company has laid out its plan to stay on track to expand its bottom-line through efficient cost cutting efforts. The company's continuous efforts to introduce new and innovative products in the fast-growing food categories will portend well for its long-term growth prospects.

Top-line story and Gross Margins

With its outstanding portfolio of brands and products, GIS generates revenues from both the U.S. and international operations. Almost 35% of its sales are drawn from its operations outside the U.S. The company recently reported a decline in revenues of 3% year-over-year in 4Q FY14. Its international segment's revenue declined by 7% year-over-year; this was a major contributor towards the recent quarter's revenue decline.

The company launched extensive scale promotions in recent quarters to increase the scale of international segment revenues. However, the promotional activities did not produce the desired results. Instead of drawing more customers through incremental promotional activities, the sales declined 3% in the quarter, led by a -2% volume contribution. Moreover, currency headwinds from international operations remain a drag on GIS' sales base. As foreign exchange contributed -2% towards the recent quarter's revenue decline.

The following chart shows the components of Q4 FY14 sales growth.
(click to enlarge)

Source: Company's Quarterly Presentation

This net sales decline, coupled with higher-than-expected input cost inflation - primarily the inflation in dairy cost - contracted the company's gross margins. GIS' gross margins was down 10 basis points in Q4 FY14 as compared to the same quarter the previous year.

GIS has successfully mapped out its plan to grow the top-line and margins through the renovation of its core products, constant innovation and successful advertising of these products. The company plans on bringing in innovation in the Canadian cereal category with the launch of its ancient grains variety of Cheerios. Moreover, in the Canadian Greek yogurt market, the company is planning to capitalize on growing consumer interest in natural sweeteners by introducing the new Yoplait Source Yogurt. With these new launches in Canada, GIS will increase its Canadian market share.

Moreover, the company is sticking to its idea of innovation in almost all categories, both in the U.S. and international markets. I believe that through these remarkable innovations, a large number of health conscious customers will flock to GIS, which will portend well for the company's sales base. The company also remains committed to lowering the cost burden through bringing in constant improvements in its supply chain. I believe the future supply chain efficiencies, coupled with the improved sales base of GIS, will also help expand its long-term margins.

Earnings Base

The declining revenues didn't hurt the company's bottom-line. As the company recently reported double-digit growth in both net earnings and diluted earnings per share, GIS improved its EPS 24% year-over-year in the recent quarter. The major contributors to the company's recent quarter's EPS growth were lowered tax rates and lower shares outstanding.

GIS also has plans to reduce operational costs in the future. Going forward, the company will start a review of its North American manufacturing and distribution network to identify possible cuts in capacity and elsewhere. By doing so, GIS will be able to generate $40 million in pretax savings during the new fiscal year. Although this cost cutting initiative may involve closing a few units or lowering work count, it will portend well in terms of growing the company's earnings base. Based on the strength of the company's cost cutting plan and growth prospects, analysts are expecting 8.46% in earnings growth for GIS.

Conclusion

I reiterate my bullish stand on GIS. The company is steadily moving to excel in the consumer sector with its promising initiatives to grow its earnings. Also, despite the recent quarter's drag on the company's sales base, earnings continue to grow. With its best-in-class innovation, GIS remains confident regarding growing its consolidated sales base. Moreover, the company's efforts to lower costs in the future will benefit the stock's performance.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: General Mills: Cutting Costs And Growing Earnings Is The Order Of The Day