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General Mills Misses 1Q18 Estimates, Stock Falls

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Part 5
General Mills Misses 1Q18 Estimates, Stock Falls PART 5 OF 6

Why General Mills’ Margins Fell in Fiscal 1Q18

What affected margins

General Mills’ (GIS) fiscal 1Q18 margins marked a significant decline as lower volumes and increased costs took a toll on its profitability. Until now, the company managed to improve margins through its cost and productivity savings initiatives. However, in fiscal 1Q18, the company’s adjusted gross margin fell 230 basis points to 35.1% as a continued decline in volumes, unfavorable mix, and increased input costs on imported products more than offset the benefits of cost savings.

Why General Mills’ Margins Fell in Fiscal 1Q18

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Operating margin plunged

General Mills’ adjusted operating margin fell 210 basis points to 17.1% in fiscal 1Q18, reflecting lower gross margins and increased advertising and media expenses offset in part by cost savings.

In comparison, General Mills’ peers have managed to report improved margins despite lower sales. Conagra Brands (CAG), Kellogg (K), Hershey (HSY), and Kraft Heinz (KHC) have reported higher operating margins during their last reported quarters, thanks to incremental cost and productivity savings.

By segments, General Mills’ North America Retail segment’s operating profit fell 15.0% YoY (year-over-year), reflecting lower volumes, higher input costs, and increased advertising and media costs. The Convenience Stores & Foodservice segment’s operating profit fell 8.0% YoY due to increased input costs and unfavorable mix.

As for Europe & Australia, operating profits fell 30.0% as the benefits of sales leverage were more than offset by a significant rise in input costs. Operating profits in the Asia & Latin America segment fell 31.0%, reflecting lower sales and increased costs.

Outlook

Despite reporting lower margins in fiscal 1Q18, General Mills’ management remains upbeat and expects adjusted profit margins to improve in fiscal 2018 on a YoY basis. The company expects margin headwinds to subside as the year progresses. The company also expects to generate higher increased cost savings in the second half of the current fiscal year with improvement in sales, which is likely to support margins growth.

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