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Summary

  • General Mills missed the fourth-quarter earnings results and its share price dropped 3.7% after the earnings release.
  • Large companies in the packaged food industry are facing sluggish demand particularly in the developed markets where consumers are shifting towards healthy breakfast foods.
  • In the given scenario, General Mills has initiated a cost-cutting program for fiscal year 2015 which will help its earrings stream through significant costs savings.

The packaged food industry is going through challenges. Consumers are shifting their eating habits away from packaged food towards healthier breakfast foods. Whether it's a cookie factory with too much production capacity or a corporate culture of first-class flights, the packaged food industry's focus these days is on cost-cutting initiatives to support their earnings growth. Most of the world's largest companies in the packaged food and snacks industry, including General Mills (NYSE:GIS), Mondelez International (NASDAQ:MDLZ), Kraft Foods Group (NASDAQ:KRFT), and Campbell Soup (NYSE:CPB) have been discussing their belt-tightening efforts at a big annual consumer conference. Continued weakness in consumer spending is making financial discipline even more important.

General Mills Missed the Earnings Expectations

General Mills' shares dropped 3.7% when the company missed the fourth-quarter results for fiscal year 2014. The adjusted earnings per share increased 24% from the fourth quarter of fiscal year to $0.67 missing analysts' expectations of $0.71. Like other large companies in the packaged food industry, General Mills is also suffering from the declining demand for its products. For the fourth quarter the revenues dropped 3% to $4.28 billion, falling behind the consensus estimates of $4.42 billion. The company reported that revenues from the sales of Betty Crocker, Cheerios and Pillsbury declined 2% following headwinds from the currency fluctuations and lower volume impact.

Observing the industry trend, the sales demand for salty snacks and artificially flavoured packaged food will remain depressed particularly in the developed markets. However, the demand is likely to increase in the emerging markets including China and India. In the given situation, to stabilize the earnings growth, General Mills has announced a cost-cutting initiative to maintain its profit margins. In the recent earnings release General Mills expressed views to expand its presence in the emerging markets. The reason behind that move is because in the fourth quarter, sales from the U.S. retail segment fell 1% to $2.4 billion while operating profits declined 3% to $502 million.

On the other hand, the international segment's operating profits boosted 4% in the fourth quarter despite a year-over-year decline in revenues as a result of currency fluctuations. In the convenience store and food services segment, revenues increased 1% to $508 million in the fourth quarter, while operating profits jumped 14%. Looking at these growth numbers, the international segment must be future growth driver for General Mills to offset the impact of sluggish demand to some extant from developed markets.

For fiscal year 2014, General Mills generated $17.9 billion revenues, which is just an increase of 1% from fiscal year 2014 while the adjusted earnings per share rose 4% to $2.82. During the year the company bought back stocks worth $1.7 billion to return cash to shareholders and this figure is almost 5% of its market capitalization.

Cost Cutting is The Strategy

General Mills is not alone in the cost saving race as other large companies have also started their cost cutting programs. Mondelez is closing older factories and replacing them with new production facilities and expects at least 50% more efficiency which will eventually help to control excessive costs. Mondelez is also closing its warehouse in the Midwest since more of its business is in the East. This will reduce warehouse costs by 5% and speed up distribution. Campbell Soup bragged that in the last thirty months it has reduced its headcount by more than 2,000 people including closing five plants as well as automation. At a cookie factory in Australia, it installed robots to increase efficiency.

In the last twelve months, the company's share price showed a steady upward trend and the stock price increased by roughly 8.2%. This steady increase in the share price is likely to continue in the next twelve months. However, the company's performance may improve as General Mills has planned a solid strategy for fiscal year 2015. General Mills intends to focus on accelerating its top-line growth. As part of product innovation, General Mills will introduce a strong new product line-up, compelling renovation of many existing brands, and a full slate of consumer-focused marketing initiatives to attract customers. In addition, supply chain cost savings from the ongoing Holistic Margin Management (HMM) program are expected to exceed $400 million in 2015.

It can be expected that these savings will offset input cost inflation which is estimated to be 3% for fiscal year 2015. General Mills expects that its net sales for fiscal year 2015 will grow at a mid-single digit in constant currency. The company also intends to put efforts into its North American manufacturing and distribution network which will result in additional cost savings of $40 million in 2015.

Conclusion

General Mills showed moderate growth in fiscal year 2014; however, the company is quite confident that its new product line and cost cutting initiatives will help mid-single digit growth for fiscal year 2015. General Mills increased the dividend payment to $983 million, and quarterly dividend increased to $0.41 per share from $0.38 per share. The company maintained the quarterly dividend in the fourth quarter and it is expected that the company will increase the dividend in the first quarter of fiscal year 2015 based on its expected earnings growth. General Mills is set to grow at a moderate rate in fiscal year 2015 and the company's commitment to investors justifies the fact that General Mills is an attractive investment with stable returns in the long term.

Source: General Mills Is An Attractive Investment