Investors were in a sour mood heading into General Mills's (NYSE: GIS) quarterly earnings report after having witnessed declining sales and reduced profitability in several of its last few outings. The consumer food specialist's announcement didn't do much to change that broader picture of mostly worsening operating results. However, General Mills remained on track to meet its modest fiscal 2019 targets.
More on that outlook in a moment. First, here's a look at its headline results .
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What happened this quarter?
Sales growth got a bit worse, and the company has continued losing money as it restructures its business to account for shifting consumer demand. The broader trends were consistent with management's targets, though, which call for sales growth to begin accelerating over the next few quarters.
Here are the key highlights of the quarter.
- Organic sales trends worsened slightly, slipping 1% compared to a less-than-1% increase in the prior quarter. Overall sales increased 5%, or 7% after accounting for currency exchange shifts, thanks mainly to the recent acquisition of the Blue Buffalo pet food franchise.
- Reported gross profit margin fell slightly but held steady at 34.5% of sales after one-time costs were accounted for. General Mills was able to boost prices modestly, which, combined with cost cuts, offset the impact from higher input costs.
- Operating profit slumped by 23% as the company took charges related to its restructuring plan. Things looked better on an adjusted basis, with margin ticking up to 17.3% of sales from 16.9% a year ago, thanks to savings from the restructuring activities.
- Cash generation was strong as the company beat its goal of converting at least 95% of earnings into free cash flow.
What management had to say
Management said its cost-cutting initiatives are paying bigger dividends than originally expected, leading to surprisingly strong adjusted earnings. "Our cost and capital discipline," CEO Jeff Harmening said in a press release, "has driven profit growth ahead of our expectations in the first half" of fiscal 2019. "I'm pleased," Harmening continued, "that our results through six months keep us on track to deliver on our full-year targets."
Harmening and his team are calling for healthy growth from the Blue Buffalo franchise, combined with accelerated sales gains in its core consumer foods business, to produce gains on both the top and bottom lines this fiscal year. That newly acquired pet food brand should allow for overall revenue to rise between 9% and 10% in 2019, executives confirmed, despite a second straight year of flat organic sales. The forecast still implies strengthening results in General Mills's cereal and snack business that investors haven't seen evidence of -- yet.
Adjusted earnings, meanwhile, are still on track to rise by less than 2% at the midpoint of guidance. Given the significant losses expected from the restructuring activities, these predictions amount to another transition year for a business that's struggling to get its portfolio of food brands growing again, while protecting profitability against rising commodity costs. It's too early to claim that recovery is taking root, but at least its operating trends are stable heading into the back half of its fiscal year.
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