MINNEAPOLIS – A difficult year-over-year sales comparison in its Blue Buffalo pet food business and merchandising issues in its cereal unit led to a sluggish second quarter for General Mills, Inc. In addition, the company recorded an impairment charge of approximately $193 million against the Progresso, Food Should Taste Good and Mountain High brands. Despite the challenges, management expressed optimism about the rest of the year and reaffirmed its full-year guidance.
“Our job to do for the second half is very clear, and that is to accelerate our sales growth in our North America Retail and pet segments while we maintain our cost discipline, and we're confident in the plans we have to do just that,” said Jeffrey L. Harmening, chairman and chief executive officer, during a Dec. 19 conference call with securities analysts.
Full-year guidance includes company sales rising 9% to 10% on a constant currency basis during the year, including a benefit from the Blue Buffalo acquisition. Earnings per share on the common stock are expected to range between flat and down 3% from a base of $3.11 earned in fiscal 2018, according to the company.
General Mills’ net income for the quarter ended Nov. 25 fell 20% to $343.4 million, equal to 57c per share, which compared with $430.5 million, or 75c per share, in the same period of the previous year.
Sales for the quarter, which included the Blue Buffalo business, rose 5% to $4,411.2 million. Organic sales fell 1% due to a decline in the North American Retail business unit.
Donal L. Mulligan, chief financial officer, said management expects net sales to grow 9% to 10% on a constant currency basis for the full year, driven primarily by acceleration of Blue Buffalo sales.
“In the first half, (Blue Buffalo) net sales results lagged consumer takeaway,” Mr. Harmening said. “We'll see this reverse in the second half, specifically in the fourth quarter when we take another big step in our food, drug and mass expansion.”
First-half sales for the pet food business rose 9%, and market share was up 40 basis points across all channels, according to the company. But the sales results paled in comparison to the same period of the previous year when Blue Buffalo sales rose 15% in the first quarter and 25% in the second quarter.
“This year’s deceleration is really the acceleration you saw last year in the comp driven by the food, drug and mass launch,” said Jeff Siemon, vice-president of investor relations for General Mills. “Q3 last year was about 15% growth in net sales, and Q4 was only up low single-digit. So, again, you saw a lot of variability last year. As we comp that this year, that will have variability, and then ... our Q4 as we expand food, drug and mass, you will see a big acceleration.”
First-half results in the cereal business were mixed across channels and geographies, according to the company.
“Positive contributions from strong innovation, including Cheerios Oat Crunch, Maple Cheerios and Lucky Charms Frosted Flakes, were outweighed by reduced merchandising activities,” Mr. Harmening said. “Second-quarter cereal merchandise volume was down 7% as we focused on implementing pricing and pack changes at the shelf early in the quarter. With those changes behind us, we were able to get back to more typical merchandising levels by the end of the quarter, helping drive November cereal retail sales in line with last year. We're confident we can improve on our first-half cereal performance as we rebalance our merchandising levels in the second half.”
For the first six months of fiscal 2019, General Mills net income totaled $735.7 million, equal to $1.23 per share, a decline when compared to the same period of the previous year, when the company earned $835.2 million, equal to $1.46 per share.
Sales for the period rose 7% to $8,505.2 million.
“Our first-half results keep us on track to deliver all of our full-year targets,” Mr. Harmening said. “Good cost control drove first-half profit results ahead of our expectations. We have clear plans for the second half to improve top-line trends in North America Retail and to significantly expand Blue Buffalo availability, while maintaining our cost and capital discipline.”