General Mills Inc. (GIS) reported strong results for the first quarter of fiscal 2010, with earnings of $1.28. Earnings were well above the Zacks Consensus Estimate of $1.03 and up 33% year-over-year. Profits were driven by lower commodity costs and strong demand for the company’s products.
Net sales for the quarter grew marginally — 0.6% year-over-year — attributable to a 4.1% decline in the International segment and 16.2% decline in Bakeries and Foodservice. In addition, foreign currency translation had a 2% unfavorable impact on the top line and pound volume also declined 2%. This was partially offset by a 5.8% growth in the U.S. Retail segment.
Segment wise: the U.S. Retail segment posted a 5.8% increase, reflecting strong growth in the Big G cereals, Meals division, Pillsbury, Yoplait yogurt and Snacks categories. Pound volume contributed 2% to top-line growth.
The International segment reported a 4.1% decline in revenues primarily due foreign currency translations. In addition, pound volumes also contracted 2% year-over-year.
The Foodservice segment reflected the absence of divested product lines and the impact of indexed bakery flour prices that were below year-ago levels. Additionally, pound volume also reduced net sales by 10%.
Gross margins for the quarter expanded a robust 738 basis points (bps) to 41.5% versus 34.1% in the comparable prior-year quarter. The increase was primarily attributable to the implementation of the holistic margin management approach by the company. This helped to improve the operating performance in the company’s manufacturing facilities.
Despite higher advertising expenses, the operating margin for the quarter expanded 623 bps to 19.7% from 13.5% in the prior-year quarter.
Cash flow from operating activities for the quarter increased 21.7% to $275 million, driven by efficient working capital management. Capital expenditures for the quarter were $126 million. The company has a debt to capitalization ratio of 51%.
Based on the results for the first quarter, management raised its guidance for fiscal 2010. Annual earnings are now expected in the range of $4.40 to $4.45 per share. The previous expectation was in the range of $4.20 to $4.25, reflecting a 5% increase.
For the rest of the year, the company intends to primarily focus on a business model that uses supply chain productivity, sales mix management and other cost savings initiatives in order to protect its margins from the pressure of rising commodity costs. Management believes that this measure will help to limit price increases and allows it to direct significant resources back into the business. This reinvestment will fuel strong sales growth, offering consumers high quality, nutritious and convenient foods at good values for the money.
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