uploads/2016/03/General-Mills-Margins-Expanded-in-Fiscal-3Q16-2016-03-291.jpg

How Does General Mills Maintain Its Strong Margin Discipline?

By

Updated

Gross margin expanded yet again: What caused it?

General Mills (GIS) maintained its strong margin discipline yet again in fiscal 3Q16 through its cost-savings initiatives. The adjusted gross margin improved by 160 basis points to 34.8%, as compared to 33.2% in fiscal 3Q15. It excluded mark-to-market effects and certain other items affecting comparability.

Cost-saving initiatives after compensating modest input cost inflation drove the margin to increase. For the first nine months of fiscal 2016, the company’s adjusted gross margin also expanded by 170 basis points.

Article continues below advertisement

Margins’ expectations for fiscal 4Q16 and 2016

For fiscal 4Q16, General Mills (GIS) projects its adjusted gross margin to be below last year’s comparable period. This was due to the highest quarterly inflation rate, which was lower a year ago. For fiscal 2016, the company expects its gross margin to expand by ~100 basis points, reflecting the low input cost inflation of 1%.

Fifth consecutive quarter of operating profit margin expansion

General Mills displayed a fifth consecutive quarter of operating margin expansion. The adjusted operating profit margin increased by 60 basis points to 15.9% compared to 15.3% in fiscal 3Q15. The total operating profit for the company totaled $586 million, up by 9.1% year-over-year.

On a constant currency basis, segment operating profit was down by a modest 1% to $679 million. This was due to the company’s cost-savings effort, which balanced the impact of the Green Giant sale.

Article continues below advertisement

General Mills’ (GIS) chairman and chief executive officer, Ken Powell, stated that the company’s disciplined financial management has enabled it to expand its adjusted operating profit margin for the fifth consecutive quarter while still investing in the Consumer First renovation and innovation initiatives. For fiscal 2016, the company expects its total segment operating profit to match last year’s levels.

Peers’ margins

General Mills’ peers include Bunge (BG), J.M. Smucker (SJM), and Flowers Foods (FLO). These competitors reported gross margins of 6.3%, 38.6%, and 46.8%, respectively, for their recently reported quarters. The PowerShares S&P 500 Low Volatility Portfolio ETF (SPLV) invests 1.04% of its holdings in SJM.

Advertisement

More From Market Realist