General Mills: Cost Savings Brighten Q2 Sales Slump

General Mills struggled to keep pace in Q2 with the price increase-driven double-digit dollar sales growth of the same period last year, per its quarterly earnings report.

Those results have been compounded by slower-than-expected volume growth recovery, CEO Jeff Harmening told shareholders on a call this morning. The report also brings mixed expectations to the Cheerios and Yoplait maker’s full year financial performance; in Q1 it pointed to price hikes as a core reason for its better-than-expected sales (+4%) during that period.

Both net and organic net sales dropped 2% in Q2 but on a 2-year compound basis, net sales were up 1% and organic net grew 4%. The company managed to buoy its bottom line via its Holistic Margin Management (HMM) cost saving program and reported margin growth of 170 basis points to 34.4%.

“One of the features of this [operating] environment has been the stabilization in the supply chain environment which has allowed us to step up HMM more acutely on [the North American Retail] business than our other segments and also to get at some of those disruption-related costs,” explained Kofi Bruce, General Mills CFO, in response to a shareholder question.

During the quarter, operating profits also increased 2% to $812 million and rose 13% on an adjusted constant currency basis. According to Harmening, in previous challenging operating environments the company has created long-term success by investing in both the consumer and capabilities like “strategic revenue management, performance marketing and automating supply chains.”

“When the consumer is stressed and results are hard to come by, one of the things we’ve seen successful companies like ours do is reinvest for the future,” Harmening said in response to a shareholder question. “Included in our results is an increase in consumer spending, even though we’ve gone down on our sales per year, we’ll still invest in consumer spending and we’re still investing all the capabilities that we know will drive our growth not only for this year, but the years to come.”

Harmening highlighted that the company’s supply chain fared better than that of other food companies over the past few years, allowing it to maintain its stronghold on in-store availability. However, as the supply networks of other companies have moderated, and specifically those of competitors like private label and smaller brands, these businesses have begun to recapture space on shelf faster than GM anticipated and has put increased pressure on the company to maintain market share in the year ahead.

“They’re now catching up to our on shelf availability and we actually improved our on shelf availability this year,” Harmening said in response to a question. “It’s not that we have gone backward – our on shelf availability is higher now – and you can see that because we’ve reduced our disruption costs. It’s just that our competitors have increased quite a bit now and have drawn even with us after trailing for like four years.”

As General Mills looks to the full year, it has adapted plans to compete in the more challenging-than-expected operating environment, Harmening said. Notably, the company revised its sales expectations to account for a slower volume rebound and for greater cost savings from its Holistic Margin Management (HMM) initiative.

“For the full year, we’ve revised our topline outlook to account for a slower volume recovery, narrowed our profit and EPS expectations within our original guidance ranges, and maintained our outlook for strong free cash flow conversion,” Hammering said in a prepared statement.