General Mills’ (GIS, Financial) performance was not very impressive this year, with share price being almost flat since the beginning of the year. One of the key reasons for the same is its lackluster performance in the last few quarters, which is reflected in its stock price. In fact, the company’s recently reported first quarter results were not up to the mark. The numbers were below the Street’s expectations, making investors unhappy.
The top line dropped 2.3% to $4.27 billion over last year’s quarter, missing the estimate by $110 million. Also, the bottom line plunged to $0.61 per share as compared to $0.70 per share in the year ago quarter. However, Wall Street was expecting it to be much better and the earnings estimate was at $0.69 per share. But the management stuck to its previously announced guidance, as it makes efforts to control costs and boost revenue.
Deeper insights
One of the key reasons for a poor performance is lower consumer spending in the U.S. Consumer spending in the U.S. declined 0.1% in July over the previous month. Also, weaker mall traffic and growing customer interests for online shopping has taken a toll on the retailer’s sales. Further, people now prefer to have organic food, which is made of natural ingredients. All these factors have affected General Mills’ revenue.
Moreover, demand for cereals has been on a decline for quite some time now. With new breakfast options flooding the market, people have shifted away from having cereals. Varieties of sandwiches, smoothies and other healthy items have taken away all the attention. Thus, traditional items have taken a back seat. Retailers such as General Mills and Kellogg (K, Financial) are feeling the pinch of it. In fact, Mills’ cereal sales declined 9% during the quarter.
The competitor’s story
Kellogg is one of the leading players in the cereals industry. Thus, it has been suffering a lot from lower demand for cereals. Its share price too has been flat since the start of the year. However, its expansion into other snacks has been helpful to some extent. For instance, it bought the Pringles business in June 2012, which boosted its revenue largely due to growing demand for chips.
Even Post Holdings (POST, Financial) is witnessing declining cereal sales. But the company has made a host of acquisitions to overcome the problem. It has made 6 acquisitions in the last year, with the most recent one being Michael Foods. These acquisitions helped the retailer register a 147% jump in its last quarter revenue.
Mills’ efforts
General Mills too is enhancing its product portfolio to attract more and more customers. It has made a number of acquisitions in the last couple of years. After acquiring Food Should Taste Good in February 2012, the company bought Yoplait and Yoki Alimentos in 2012. This enabled it to strengthen its presence in the yogurt segment.
Further, General Mills is on the verge of acquiring Annie’s, provider of organic and natural food, in the days to come. This will further strengthen the company’s organic food offerings and give health-conscious customers an added reason to buy its products.
Also, 250 new products have been introduced and new partnership with McDonald’s (MCD, Financial) have been entered into to offer Mills’ yogurts with its Happy Meals.
The bottom line, too, is taken care of by implementing various cost-cutting initiatives, such as combining capacities of Yoplait and General Mills. Another cost-cutting program, called Holistic Margin Management, will result in $400 million of cost savings by 2015. Thus, these measures should help the company do better in the future.
Impressive valuation
Currently, General Mills’ P/E is at 18.49, which is lower than the industry average of 22.35. This looks impressive. Also, its forward P/E stands at 15.85, which shows that the company is expected to earn more in the future. Moreover, analysts expect its top line to grow at the rate of 6.58% in the next five years. These numbers make this food provider an interesting pick. Although the company is undergoing a difficult phase, its measures to overcome it and strength in valuation numbers make it a desirable pick for the long run.
