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Why General Mills’ Margins Could Expand

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Margins expanded despite lower sales

General Mills (GIS) has managed to expand margins despite lower sales. The company’s HMM (holistic margin management) initiatives are leading to lower cost of goods sold, which in turn is boosting its gross margins. Also, General Mills generates significant savings from its productivity and restructuring measures, which include the adoption of zero-based budgeting and global restructuring initiatives. Also, higher net price realization and decline in advertising and promotional spending supplemented its margins growth.

During the last reported quarter, the company’s adjusted gross margin grew 70 basis points, while the adjusted operating margin rate remained strong and expanded by 220 basis points.

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In comparison, major food manufacturers in the US (SPY) are also focusing on reducing costs and generating higher productivity savings to drive margins as sales remain elusive. For instance, Kraft Heinz (KHC), Kellogg (K), and Conagra Brands (CAG) have posted healthy margins growth despite reporting a decline in sales.

Outlook

The company’s margins are likely to improve in coming quarters despite sluggish sales. General Mills expects to generate about $390.0 million in savings from the cost of goods sold through its HMM (holistic margin management) initiatives in fiscal 2018, which will boost the gross margin rate. Also, the company is projected to generate additional savings of $700.0 million through its restructuring and productivity initiatives, which are expected to boost its operating margins rate.

However, an anticipated decline in volumes, mainly in the North American region, higher promotional expenses planned for the second half of the year, and rising input costs are likely to remain a drag.

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