MINNEAPOLIS — General Mills, Inc. is the first major publicly traded food or beverage company to release its quarterly sales and earnings results during the coronavirus outbreak that is impacting the daily life of consumers worldwide. Even though the financial results were for the third quarter ended Feb. 23, weeks before the state and federal response to the outbreak accelerated, most questions from analysts participating in the company’s conference call focused on the future and how the outbreak will affect the company. Management’s response was succinct — It’s too early to tell.
“We've seen increased customer orders and higher retail sales takeaway in Nielsen-measured channels since the beginning of March,” said Jeffrey L. Harmening, chairman and chief executive officer on March 18. “Our US retail sales results for the week ended March 7 were up low double digits, including Pet, and we anticipate takeaway for the week ending March 14 will be many times higher across all channels.
“While we assume this short-term stock up demand will add in the coming months, our expectation is that overall at-home food demand will remain elevated in Q4, and the bulk of any unwind will happen in fiscal '21. There is a great deal of uncertainty in this component of our forecast, and if we see a material change in outlook, we will provide an update before the end of the fiscal year.”
A top priority for management is keeping the supply chain functioning. General Mills’ service levels are over 90%, Mr. Harmening said, and the supply chain has been working “very well,” to date.
“I can tell you that food continues to flow; we continue to make it,” he said. “Our retailers continue to stock as quickly as they can.”
Jonathan J. Nudi, group president of North America Retail, said General Mills’ plants are running near capacity and ahead of the throughputs planned over the last couple of weeks. A new focus has been working with retailers to “simplify the supply chain.”
“In some cases, that might mean running fewer SKUs (stock-keeping units), running the big SKUs of soup and not running some of the tail brands,” he said.
Other changes may include shipping full pallet quantities as opposed to mix layers on pallets. It may also include making trade-offs around direct-store deliveries to retailers.
To prevent the virus from spreading into manufacturing facilities, General Mills is offering paid sick leave and encouraging all employees who feel ill to stay home.
“We anticipate continuing production through … the course of our normal actions,” Mr. Harmening said. “The only thing we've done differently at some of our sites is that we have incurred social distancing. So, instead of having everybody gather in the lunch ring over time, we're encouraging people to do it at different times. And instead of having breaks out one-time, doing breaks at different times.”
He added that General Mills has “worked through a number of contingencies” to keep the supply chain functioning but did not elaborate on what they may be.
Analysts also focused questions on parallels between the company’s experiences in China, where it has food manufacturing and foodservice operations, during the height of that country’s outbreak vs what may be seen in the United States.
“Nearly half of our Häagen-Dazs shops in Greater China had been temporarily closed,” Mr. Harmening said. “In total, we saw a 90% decline in traffic and shops and substantial declines in other foodservice outlets in China in February, resulting in a significant reduction in Häagen-Dazs sales in Asia for the month.”
Sales in its frozen dumpling business, on the other hand, has been up double digits.
“It's very clear that we've increased household penetration in China, and that demand continues to be strong, even as our shop business opens up and China gets back to work,” he said. “And so I'm not sure the lessons we learned in China will hold everywhere, but at least what we're seeing in China is that our household penetration on Wanchai Ferry dumplings has increased.”
Third quarter results flat
Net income for the third quarter was $454 million, equal to 75¢ per share on the common stock, and up slightly when compared with the same period of the previous year when General Mills earned $447 million, or 74¢ per share.
Sales for the quarter were $4.18 billion, down slightly from the previous year when sales were $4.2 billion.
Organic net sales were also flat to last year, with strong growth for the Pet segment largely offset by declines in North America Retail and Convenience Stores & Foodservice. A modest decline in organic volume was offset by favorable organic net price realization and mix. Third-quarter net sales results vs the prior year included a 50 basis-point headwind from lower Häagen-Dazs net sales in Asia in February, driven by the impact of the coronavirus virus outbreak.
More specifically, the North America Retail business unit saw sales fall 1% to $2.5 billion. Net sales were down 2% in the US Meals & Baking operating unit and down 1% each in US Cereal, US Snacks, and US Yogurt. Canada operating unit sales were up 6%.
Third-quarter net sales for the Pet segment increased 11% to $384 million, driven by positive contributions from volume growth and positive net price realization and mix, according to the company. Net sales performance was led by double-digit growth on Blue’s two largest product lines: Life Protection Formula and Wilderness.
In the Convenience Store & Foodservice business, net sales fell 2% to $465 million. The decline was driven by flours and mixes, but partially offset by low-single digit growth in cereals, frozen baked goods and yogurt.
During the fourth quarter, management expects organic net sales growth to “step up significantly,” said Kofi A. Bruce, chief financial officer. It will be driven by North America Retail and an extra month of results for the Pet segment.
“This accelerated net sales growth will drive a strong increase in gross profit dollars in the quarter, which will be partially offset by a significant increase in growth investments, in brand building and capabilities,” he said. “With regards to the impact of COVID-19, we will remain agile as the demand for at-home versus away-from-home food evolves across our markets. Our outlook assumes that we continue our strong supply chain execution through the end of the year without significant disruption.”