General Mills’ Extraordinary Results
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With cost inflation at its highest in the last few years, retailers are finding ways to save money and increase their top line through various measures. A price hike doesn’t work always, since it might trigger a customer exodus from the stores and make them more calculative about their spending. Some may even go for shrinking product sizes helping them fight the devil.
An attractive measure employed by many companies recently is inorganic growth. This is a very effective tool since it instantly gives a boost to the top line and enables it to enter new markets. There have been many, such as Bed Bath & Beyond (NASDAQ: BBBY) which posted great first quarter results, driven by discount coupons issued to regular customers. The home furnishing retailer will be closing the acquisition of Cost Plus (NASDAQ: CPWM), another home decor retailer which also offers food and beverages. Bed Bath & Beyond will be using this acquisition to help drive its business at a time when consumer spending is weak.
But here is a consumer food retailer, General Mills (NYSE: GIS), which has already showcased how this strategy is working out in a tough environment with rising input prices. General Mills posted attractive fourth quarter results which met market expectations but was a little dull on the outlook.
Benefits of the Deal…
The addition of the Yoplait yogurt business in July last year helped the top line grow 12% to $4.07 billion from the year-ago period. In fact, the Yoplait business played a major role in driving sales in the International segment which jumped 46% to $1.1 billion. On the other hand, the U.S. Retail and Bakeries & foodservice segments surged by a meager 2.9% and 1.7%, respectively. The Minneapolis based retailer made certain other buyouts in order to strengthen its portfolio such as Parampara, an Indian Spice company and Yoki Alimentos, a Brazilian food maker through which the company expects to expand its market presence, particularly in the emerging markets. This strategy of bolt on acquisition will probably help the company do even better moving forward.
However, the rising raw material costs took a toll on margins, which decreased 140 basis point to 37.2% in the quarter. But the company managed to push its earnings north by 15% to 60 cents a share using cost saving initiatives. The cereal and snacks chain cut its workforce by 2% globally in an attempt to cut costs. A factor which drove both the top line and the bottom line was the increased promotional efforts which attracted the crowd towards its products.
Additionally, it launched a lot of new products, the low calorie brownie snack bars and Yoplait yogurt being some of the best examples.
Plans in the Queue
The consumer food giant has huge plans in its pipeline, which include focusing on emerging markets since European and American markets are going through a tough phase with restrained consumer spending. So the company sees potential in other economies. It will be setting up a large number of Haagan-Dazs ice cream shops in China where it foresees maximum potential. Also, it will be investing more in new product launches in 2013, which include as much as 35 new kinds of yogurt products in the U.S.
Hitting a Bump…
The only problem with its announcement this time was an unattractive outlook because of higher pension costs. Even the acquisition of Yoki Alimentos, expected to close in the first half of 2013, is estimated to have a negative effect on earnings by 2 to 3 cents. But what would give some relief to General Mills is that cost inflation is expected to come down to 2% to 3% for fiscal year 2013.
With the popularity of its yogurt business among health conscious customers, the company has been able to see good results in its recent quarter. It plans to further strengthen this product line to complement its other growth efforts. General Mills has been keeping its investors happy by declaring an increase of 8% in its dividend just a day before it announced its results. Even the restructuring plan will help the retailer brighten its bottom line. With cost inflation easing off, the food retailer looks like a good bet in the long term.
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