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GIS AT A GLANCE

P/E ► 14.3 AVG EV/EBITDA ► 9.17 AVG ROA ► 10.7% AVG ROE ► 28.7% AVG Debt to Equity ► 2.05 AVG Current Ratio ► 1.19 LOW Interest Coverage Ratio ► 7.49 AVG

 

 

 

 

 

 

General Mills (NYSE: GIS) is one of the largest packaged food producers in the world, with over $14 billion in sales in 2008^[1]. The firm owns some of the most recognizable brands in the grocery store, including Cheerios, Progresso Soup, Hamburger Helper, and Fruit Roll-Ups. U.S. retail accounts for 68% of sales^[2], but its international segment, helped by a joint venture with French food giant Nestle SA, is growing fast as the company now operates in 100 countries worldwide.

Like many other food and beverage companies, General Mills faces a market marked by increasing commodities prices. The company is a large purchaser of corn and wheat, and the rise in the price of oil has hurt as well. As the costs of doing business increase, General Mills must either absorb these losses or charge higher prices at the risk of losing market share. Nonetheless, General Mills has managed to maintain its gross margin constant in the face of the 2008 Financial Crisis; it fell only slightly from 35.7 percent in 2008 to 35.6 percent in 2009.^[1] In doing so, the company has introduced new products like lower-sodium Progresso soups and Hamburger Helper singles for the microwave, while growing its reach from grocery stores into new channels like supercenters, drug and discount stores, and convenience stores. It is also expanding into fast growing markets like China, Russia and Latin America.^[3]

History

General Mills traces its history to Cadwallader Washburn, who opened a flour mill in 1866. After his business, the Washburn Crosby Co., won a gold medal at a competition, the company's flour was renamed Gold Medal (a brand that General Mills still owns). ]In 1928, Washburn Crosby merged with several other milling companies to form a flour company called General Mills. That year, the company's stock was listed on the New York Stock Exchange. Over the next half century, the company launched a number of brands, including Wheaties, Kix, Cheerios, and Nature Valley. General Mills also purchased a number of non-core businesses, including Eddie Bauer, Talbots, and the maker of Play Doh, although those businesses were spun off in the mid-1980s. In 2001, General Mills purchased Pillsbury in a $10.4 billion deal. The integration of the Pillsbury business is now complete.

Business Overview

The company divides its business into three core segments: U.S. retail, international, and bakeries and foodservice. The U.S. retail division is responsible for the vast majority of the company's profits and sales.

Quarterly Update

Q3 2009

In the third quarter of 2009, General Mills posted revenues of $3.537 billion, a 4% increase from Q3 2008 figures; net income fell 33% to $289 million.^[15] The increase in revenue was entirely attributable to net pricing increases throughout General Mills' product lines. These pricing increases counteracted a 3% loss in foreign currency exchange.^[16] Net Income was negatively affected by higher cost of sales driven by smaller gains on commodity hedges: in 3Q2008, General Mills realized $151 million in gains on hedges versus $71 million in gains in 2009.^[16] Additionally, General Mills faced an adverse tax decision which resulted in an additional $53 million income tax expense in 2009.^[17]

Q4 2009

In the fourth quarter of 2009, General Mills posted revenues of $3.646 billion, a 5% increase from Q4 2008 figures; net income rose 93.7% to $358.8 million.^[1] The increase in revenue was entirely due to the inclusion of an extra week in the quarter; a 3% increase in sales volume was negated by an equal 3% loss on foreign currency translation.^[1] Net income increased as a result of lower input costs as well as gains from commodity hedges. Excluding these one time gains, net income would've risen 18% from year previous figures. Unlike its competitors, General Mills gained market share and sales volume during the quarter due to a 19% increase is marketing and advertising spending. Advertising costs provided a good return on investment (ROI) as operating profits grew 29%.^[1]

Q1 2010

In the first quarter of 2010, General Mills posted revenues of $3.519 billion, a .6% increase from Q1 2009 figures; net income rose by 51% to $421 million.^[18] The company's results across its segments was variable, with a 6% gain in North America, 4% decrease in International (almost entirely due to adverse currency fluctuations), and a 16% decrease in Foodservice. Net income benefited from lower commodity costs and a 740 basis point increase in gross margin. General Mills announced fiscal year 2010 EPS guidance of $4.20, an 11% increase from 2009.^[18]

Q2 2010

In the second quarter of 2010, General Mills posted revenues of $4.078 billion, an increase of 2% from Q2 2010; net income increased 13% to $880 million.^[19] The increased revenue was due primarily to improved pricing and favorable foreign exchange balance based on the strength of the U.S. Dollar (USD). These positive forces were offset by volume for the quarter remaining flat and the sale of Pop*Secret in this quarter last year, which buffeted revenue numbers. U.S. Retail and International segments increased revenues by 4 and 7%, respectively, while Bakeries and Foodservices' revenues decreased by 16%.^[20] U.S. Retail's growth was the result of 10% increase in net sales for Big G cereals, which had big volume gains for Chex, Cheerios, and Fiber One brands. International's growth stemmed from a 15% net sales increase for Canada as the result of Olympic promotions, new products, and the favorable currency exchange; and from a 12% net sales increase in Asia/Pacific as the result of the growth of Häagen-Daz's Mooncakes in China.^[21] The decrease in Bakeries and Foodservices was caused by a 10% decrease in volume, 8% of which was the result of divested product lines.^[22]

U.S. Retail (68.4% of Revenues, 83.6% of Operating Income)^[1]

The company sells a line of "Big G Cereals," such as Cheerios, Total, Chex, Lucky Charms, and Kix. It also sells a number of "convenient dinner products," including Betty Crocker and Hamburger Helper dinner mixes, Progresso soups, and Green Giant vegetables. Since its 2001 purchase of Pillsbury, General Mills has also offered Pillsbury refrigerated dough products. The company also distributes a number of other baking products under the Betty Crocker name, as well as Gold Medal flour. General Mills produces a number of snacks, including Nature Valley granola bars, Chex Mix, Fruit Roll-Ups, and Fruit By The Foot. General Mills also sells Yoplait and Colombo yogurt.^[23]

International (17.6% of Revenues, 10% of Operating Income)^[1]

General Mills' international unit generates 17 percent of the company's sales^[24]. General Mills makes its products in 17 countries and sells them in more than 100. General Mills sells its cereals outside the United States and Canada primarily through a joint venture with Swiss food giant Nestle. Both companies control 50 percent of Cereal Partners Worldwide, which sells the cereals around the world. General Mills also has a second joint venture with Nestle with regard to the Haagen-Dazs ice cream brand. Under the agreement, General Mills distributes Haagen-Dazs ice cream internationally while Nestle sells Haagen-Dazs products in the United States and Canada^[25].

Bakeries and Foodservice (13.9% of Revenues, 6.4% of Net Income)^[1]

In its bakeries and foodservice division, General Mills sells mixes, frozen dough products, and flour to restaurants, cafeterias, food service distributors, and bakeries. This business line has been the hardest hit by the global recession as customers have reduced their orders. Revenues have also decreased as wheat prices, and therefore flour prices, have decline from their 2008 highs.^[18]

Trends & Forces

Rising Food & Energy Costs Pressure Margins

General Mills buys a number of commodities in order to manufacture its products, including cereal grains, sugar, dairy products, and fruit. Changes in the prices of such raw materials could negatively impact total production costs. Because General Mills operates in such a competitive environment, the fear of losing market share limits the company from charging its customers higher prices. To mitigate this ever-present risk, the company purchases commodities in advance using futures contracts and hedges the risks associated with buying commodities. However, the company expects input costs to increase by 9% in 2009.^[26]

Historical Corn prices per bushel^[27]

Wheat Prices Have Fallen From Their 2008 Highs^[28]

Supermarket Consolidation Reduces Bargaining Power

A steady trend toward supermarket consolidation is concentrating the buying power of General Mill's largest customers. General Mill's largest customer is Wal-Mart Stores. Wal-Mart made up 20 percent of total sales in 2007, including 27 percent of sales at the U.S. retail division^[29]. Although no other company made up more than 10 percent of sales, the company claims that its five largest customers in the U.S. retail division made up 54 percent of total sales in 2007 and the five largest customers in bakeries and foodservice made up 40 percent of total sales^[30]. Because these large customers are so important to sales, Kellogg has less bargaining power when determining wholesale prices.

New Healthy Products Draw New Customers

Increasingly, consumers are buying products that claim to promote better health. Food companies like General Mills have had to adjust their product portfolios in order to adapt to this consumer trend. As of fiscal 2007, General Mills boasted over 100 products with less than 100 calories per serving^[31] General Mills has seen particular success its yogurt segment; retail sales for Yoplait Light yogurt grew 20 percent in fiscal 2007 due in part to a strong advertising message that this yogurt tastes great and has 100 calories per serving^[32]. General Mills has also seen success with the introduction of lower sodium, lower fat Progresso soups which contributed to 10% growth in that product line over 2007^[33]. In the cereal category, General Mills has added whole grains to many of its cereals and has increased the amount of dietary fiber and iron in its reduced sugar cereals. At least three of its brands, Wheaties, Total, and Cascadian Farms, are considered among the leaders in healthy cereals.

Competition

In addition, in order to compete with an increasing array of private label brands produced by private label manufacturers and supermarkets, General Mills has had to increase advertising expenditures. In 2006 two of General Mill's largest units, Pillsbury USA and Big G cereals, posted negative sales growth. The company has said it will "launch new products, achieve competitive levels of retailer merchandising activity and increase advertising" this year at "Big G^[34]." At Pillsbury, the company says it plans to launch new products.^[35]

Even brands that are currently doing well, such as Yoplait and Progresso which saw double digit growth over fiscal 2007, could face increasing competition in the near-term. Danone, the maker of Dannon yogurts, is competing with General Mills in its fastest growing business—yogurts. Yoplait controled 40 percent of the American market for yogurt in 2006. Yoplait's sales growth was 14% vs.the overall market which grew 8%. Meanwhile, General Mills is defending its market share from Campbell Soup—which introduced a range of low-sodium soups in 2006— by introducing its own line of healthier, low-sodium Progresso soups.^[36]

Market Share

Although General Mills is the second largest cereal maker in the United States after Kellogg, its products are still highly susceptible to price cuts and promotions by its competitors. Over the last few years, partly due to this competition, the company has lost market share in its cereal business. Kellogg now controls about one-third of the market, followed by General Mills with 31 percent and Quaker (a division of PepsiCo) and Post (a division of Kraft Foods) with 30 percent. Kellogg has also launched more cereals than General Mills recently. Kellogg controls 50% of the market for new cereals in the United States. New cereals are particularly important since manufacturers generally charge higher prices for them than for older products.

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7} 4Q2009 Press Release.
2. ↑ General Mills 2007 10-K Letter to Shareholders
3. ↑ General Mills 2007 10-K Letter to Shareholders
4. ↑ General Mills 2005 10-K General Mills at a Glance
5. ↑ General Mills 2006 10-K General Mills at a Glance
6. ↑ General Mills 2007 10-K General Mills at a Glance
7. ↑ ^{7.0 7.1 7.2 7.3 7.4} GIS 2008 10-K  
8. ↑ General Mills 2005 10-K General Mills at a Glance
9. ↑ General Mills 2006 10-K General Mills at a Glance
10. ↑ General Mills 2007 10-K General Mills at a Glance
11. ↑ General Mills 2007 10-K General Mills at a Glance
12. ↑ General Mills 2005 10-K General Mills at a Glance
13. ↑ General Mills 2006 10-K General Mills at a Glance
14. ↑ General Mills 2007 10-K General Mills at a Glance
15. ↑ GIS 2008 10-Q  
16. ↑ ^{16.0 16.1} GIS 2008 10-Q  
17. ↑ GIS 2008 10-Q  
18. ↑ ^{18.0 18.1 18.2} General Mills Reports Strong Results for Fiscal 2010 First Quarter.
19. ↑ GIS Q2 2010 10-Q, p. 24
20. ↑ GIS Q2 2010 Earnings Call Transcript, Seeking Alpha
21. ↑ GIS Q2 2010 10-Q, p. 27-28
22. ↑ GIS Q2 2010 10-Q, p. 28
23. ↑ General Mills 2007 10-K Portfolio p. 6-15
24. ↑ General Mills 2007 10-K General Mills at a Glance
25. ↑ General Mills 2007 10-k General Mills at a Glance
26. ↑ General Mills December sales up, keeps full-year view.
27. ↑ Corn Prices.
28. ↑ You must specify title = and url = when using {{cite web}}..
29. ↑ General Mills 2007 10-K Notes to Consolidated Financial Statements
30. ↑ General Mills 2007 10-K Notes to Consolidated Financial Statements
31. ↑ General Mills 2007 10-K Portfolio p. 10
32. ↑ General Mills 2007 10-K Portfolio p. 10
33. ↑ General Mills 2007 10-K Portfolio p. 10
34. ↑ General Mills 2006 10-K Letter to Shareholders
35. ↑ General Mills 2006 10-K Letter to Shareholders
36. ↑ General Mills 2007 10-K Portfolio p. 10