General Mills posted fiscal second-quarter results Tuesday that showed solid sales expansion thanks primarily to its acquisition of Yoplait but modest segment operating profit growth due to higher input costs and marketing expenses. Diluted EPS, excluding non-recurring items, came in at $0.76, reflecting no growth from the same period a year ago. We are maintaining our $38 per share fair value estimate.
The firm’s net sales jumped 14% thanks to higher pricing and significant volume growth from its recent acquisition of Yoplait. Revenue in General Mills’ US retail operations during the period grew a meager 3% as demand for flour, dessert mixes, canned and frozen vegetables, and yogurt waned, though higher pricing more than offset the volume declines. International sales grew significantly thanks almost entirely to the Yoplait acquisition, though we estimate international organic expansion was still a respectable 8% in the quarter.
General Mills faced gross-margin pressure due to higher input costs and a negative mix shift due to its move into the yogurt business. Advertising and media expense also increased 8% in the period, pushing operating-profit growth down to a meager 2% from last year’s quarter. Though the firm continues to execute on its price realization plans, the magnitude of the pricing increases are less than sufficient, in our opinion.
Looking ahead, General Mills noted much of the same – continued profit pressure from input costs and an ongoing negative mix shift due to the Yoplait acquisition. Specifically, the company said it expects its second-half gross margin as a percentage of sales to fall below year-ago levels, though second-half operating profit will still expand. The firm also reaffirmed its full-year fiscal 2012 earnings per share guidance in the range $2.59 to $2.61, consistent with our expectations. Overall, we were less-than-impressed with General Mills’ performance but the company remains on track to achieve our long-term projections.