Yogurt, retail merchandising headwinds impact General Mills earnings

by Keith Nunes
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Increased competition in the yogurt category pressured General Mills’ third-quarter earnings.

MINNEAPOLIS — A strong dollar combined with increased competition in the yogurt category and reduced display merchandising in the company’s U.S. Retail business unit pressured General Mills’ third-quarter earnings, ended Feb. 28.

Net income for the quarter rose 5% to $361.7 million, equal to 61c per share on the common stock, which compared with $343.2 million, or 57c per share, in the same period a year ago.

Sales fell 8% during the quarter to $4,002.4 million.

Don Mulligan, General Mills
Don Mulligan, c.f.o. of General Mills

“General Mills’ third-quarter results were in line with our expectations,” said Don Mulligan, chief financial officer, in a conference call with financial analysts on March 23. “Net sales, total segment operating profit and adjusted diluted e.p.s. results declined, reflecting the effects of foreign exchange and the Green Giant divestiture. Net sales growth continues to be impacted by high levels of competitive activity in U.S. yogurt and lower display merchandising for U.S. Retail.”

U.S. Retail business sales fell 6% during the quarter compared with the same period of the previous year to $2,476.8 million.

Jeff Harmening, General Mills
Jeff Harmening, c.o.o. of General Mills' U.S. Retail

“Net sales for our yogurt operating unit have been impacted by high competitive activity, while reduced display merchandising has particularly impacted our cereal and snacks results,” said Jeff Harmening, chief operating officer of U.S. Retail.

To address the competitive yogurt business Mr. Harmening said General Mills plans to become more competitive, but will not sacrifice margins for volume.

“We believe that yogurt is an attractive growth category now and for the long term,” Mr. Harmening said. “We’re focusing on initiatives that help drive category growth by generating news, expanding usage occasions, and bringing new consumers to the shelf. Over time, innovation and great marketing will be the key factors to winning in this category.”

Despite Mr. Harmening’s outlook, several financial analysts on the call asked for more detail about the company’s plans to compete in the expanding yogurt category.

Ken Powell, General Mills
Ken Powell, c.e.o. of General Mills

“ … There is a tremendous amount of new product activity in the yogurt area,” said Ken Powell, chief executive officer. “Lots of them don’t stick around for very long … (but) there are a lot of them though and it’s become a more competitive category.

“… We’re able to succeed because of the scale and the distribution power that we have, so we’re confident that we can continue to grow there. It’s an exciting space and huge category globally. We have very high capability and so we’re just going to stay focused on the kind of innovation that will work in the category.”

The U.S. Retail business saw its display merchandising with a key customer reduced by more than 30%, Mr. Harmening said, and that also had an impact on the business unit’s performance.

“We’ll begin lapping these reductions at the end of the fourth quarter and will fully lap them after the first quarter of F.Y. 17,” he said.

For the first nine months of fiscal 2016, General Mills’ net income was $1,317.8 million, or $2.20 per share, an increase compared with the previous year when earnings were $1,034.5 million, or $1.71 per share.

Sales for the period were $12,635.2 million, a decline of 5.2% compared with the previous year.

“For the full year, we are reaffirming the guidance we updated on the second-quarter earnings call,” Mr. Mulligan said. “Specifically, we expect a low single-digit decline in net sales from the 2015 level that included a 53rd week and a full year of Green Giant, total segment operating profit matching last year’s levels and a low single-digit growth in adjusted diluted earnings per share, all in constant currency.

“We now expect the impact of currency translation to result in an 8c headwind to full-year adjusted diluted e.p.s. growth in 2016. Included in this guidance is a fourth quarter where we expect low single-digit comparable sales growth.”

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