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Productivity and Pricing Power Pace General Mills' Third Quarter

Asit Sharma, The Motley Fool

General Mills (NYSE: GIS) revealed positive organic growth and an improving bottom line in its fiscal third-quarter 2019 report (the three months ended Feb. 24). The packaged foods giant's top line benefited as expected from the acquisition of Blue Buffalo Pet Products in April 2018. However, the company surprised investors with robust margin growth, sending shares up as much as 4% in the trading session following the earnings release on Wednesday.

Note that all comparison numbers in this article refer to the prior-year comparable quarter (the third quarter of fiscal 2018).

General Mills: The raw numbers

Metric Q3 2019 Q3 2018 Growth (YOY)
Revenue $4.19 billion $3.88 billion 8%
Net income $446.8 million $941.4 million (52.5%)
Diluted EPS $0.74 $1.62 (54.3%)

YOY = year over year. EPS = earnings per share. Data source: General Mills.

What happened this quarter?

A young girl holding up a spoonful of breakfast cereal at a kitchen table, with a glass of orange juice in front of her.

Image source: Getty Images.

What management had to say

In General Mills' earnings press release, CEO Jeff Harmening discussed the key drivers of the favorable earnings report, and discussed the company's outlook for the remaining quarter of the fiscal year:

Looking forward

General Mills provided specifics on Harmening's earnings outlook-related comments. The company now expects full fiscal year organic sales to increase at the lower end of the previously issued range of flat to 1% growth.

Similarly, year-over-year net sales growth is now expected to hit the bottom of the 9% to 10% projected expansion range (in constant currency terms).

Conversely, earnings expectations have shifted to higher ground. Management anticipates that full-year adjusted diluted EPS will now be flat or improve 1% against the $3.11 earned last year (in constant currency terms), versus prior guidance of flat earnings or a decline of up to 3 percentage points. Given the full fiscal year revisions, shareholders appear pleased that promised bottom-line momentum has appeared to support the revenue boost attained from the Blue Buffalo acquisition.

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  • After adjusting for acquired revenue from the Blue Buffalo purchase, organic revenue grew by 1%, which management attributed to higher net price realization and improved product mix, offset by lower volumes.

  • General Mills enhanced its gross margin by a solid 200 basis points to 34.4%. Cost-cutting and productivity initiatives, improved pricing power and product mix, and the addition of Blue Buffalo sales helped push gross profitability higher, though this was offset by higher input costs.

  • The company's largest segment, its North American retail business, booked essentially flat net sales of $2.52 billion. However, segment operating profit ticked up by 12% to $582 million, due to the gross margin factors discussed above and lower selling, general, and administrative (SG&A) expenses.

  • Net sales in the Europe and Australia segment dipped by 8% to $433 million, paced by 6 percentage points of unfavorable foreign currency exchange. Organic sales in this segment declined 2%, as weaker Yoplait yogurt sales were partially offset by strength in snack bars and Haagen-Dazs ice cream. Segment operating profit fell by 11% to $24 million, with all but 1 percentage point of the difference stemming from foreign currency translation.

  • Pet segment net sales increased by 4% to $347 million. Operating profit slipped by $2 million to $73 million, due to higher input costs as well as plant start-up costs and the amortization of intangibles (both related to the Blue Buffalo acquisition). These factors were somewhat mitigated by cost-cutting initiatives and merger synergies. Management expects segment revenue growth to "accelerate rapidly" into the double digits in the fourth quarter, as it expands the Blue Buffalo brand in food, mass, and drug (FDM) channels while expanding product assortment.

  • The company's remaining segments both saw promising sales expansion. While the Asia and Latin America business recorded a net sales decline of 2% to $48 million, organic sales rose 7%. The convenience stores and foodservice business notched a 3% revenue advance to $472 million, due to higher sales of "Focus 6" products, which are primarily frozen meals and snacks, and frozen baked goods.

  • General Mills recorded a pre-tax loss of $35 million as it exited its Argentina-based La Saltena refrigerated dough business.

  • The disparity between current and prior-quarter earnings seen in the table above is the result of a tax benefit of $432.5 million recorded in the fiscal third quarter of 2017, due to U.S. tax legislation.

We had a strong third quarter, with positive organic sales growth and significant operating margin expansion. Our year-to-date performance and fourth-quarter plans give us confidence that we will meet or exceed all of our key fiscal 2019 targets. For the full year, we now expect adjusted diluted EPS and free cash flow conversion will exceed our initial targets, net sales will finish toward the lower end of our guidance range, and adjusted operating profit will finish toward the higher end of the range. Our improved execution and strengthened performance this year reinforce our view that a balanced approach to top and bottom-line growth, centered on our Consumer First strategy, will drive long-term value for our shareholders.

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .