General Mills Earnings Beat Masks Revenue Concerns

General-Mills-earningsShares of General Mills (NYSE: GIS) rose in early market trading Wednesday after the company posted a mixed earnings report for its fiscal fourth quarter. Investors appeared to initially like what the General Mills earnings report had to say about last quarter, and the fact that its quarterly profits beat expectations.

But underneath the optimism is a layer of concern. General Mills, like a lot of other giant food companies, is seeing a massive shift in consumer eating habits. And, like most other large food makers, General Mills has been slow to keep up.

Consumers are widely demanding fresher foods like organics, with healthier ingredients, and are rapidly turning away from pre-packaged, shelf-stable foods.

This has caught General Mills off guard, and the company’s growth has been muted for several quarters in a row. For example, General Mills earned $0.75 a share last quarter after stripping out asset impairment and certain pre-tax costs. This beat the average analyst forecast of $0.71 per share in profit.

But General Mills’ revenue of $4.3 billion came in short of expectations; analysts had looked for $4.52 billion in sales.

General Mills was hurt slightly by the strong U.S. dollar, which crimped international sales last quarter. But more concerning is the underlying consumer trend happening right beneath General Mills’ feet.

General Mills’ revenue declined for the full fiscal year in the United States, as did its profits. For fiscal 2015, net sales fell 2%. Even when excluding the effects of currency translations, sales only inched up 1% and earnings per share grew 4%. But General Mills’ results were boosted by a 53rd week as well.

Meaningful Response?

This slow decline is nothing new for General Mills, which is why investors are right to be frustrated with the lack of a meaningful response. General Mills did buy natural and organic food company Annie’s last year, for $820 million.

But General Mills’ efforts pretty much stopped there. That is hurting the company. Buying Annie’s did not simply solve all of its problems. For one, General Mills is seeing erosion in its own key brands, namely cereal. Consumers simply aren’t buying cereal like they used to, as the breakfast food has gotten hit by criticism for its sugar content.

Furthermore, buying Annie’s could not simply cure all that ails General Mills because it was a relatively small bolt-on deal, and not a transformative merger. Annie’s generated $204 million of sales in its most recent full fiscal year.

Bringing in Annie’s effectively doubled General Mills’ presence in organics, but General Mills is a $17 billion company by annual revenue. In fiscal 2015, Annie’s contributed just 1 point of net sales growth.

General Mills managed to beat expectations on profit, purely because the company is aggressively cutting costs, including slashing jobs and lower advertising expenses. This helped selling, general, and administrative costs decline by 4% for the year.

Revenues Stagnate

But cost cuts only get a company so far, which explains investors’ tepid reaction to General Mills’ results. Beating analyst forecasts on profit is little consolation for investors when revenue across the key brands continues to stagnate. General Mills is looking to outright sell its Green Giant brand, and the company would be wise to use the proceeds to expand its footprint in fresher foods like organics.

In the meantime, General Mills remains a strong dividend stock. It pays an annual $1.76 per share dividend, which provides a 3.1% yield based on its recent closing price. This is a nice yield, but that’s about all investors are getting.

General Mills isn’t growing, and with each passing quarter, is looking like a company living in the past rather than looking forward to the future.

Collect Dividend Income Every Month! 

We’ve put together a simple calendar that pulls together all the market’s best dividends into a single, easy-to-read document. One look, and you’ll be able to set up a 12-month dividend stream for regular income every month.

Click here to see the full details.

Published by Wyatt Investment Research at