General Mills (GIS) posted disappointing fiscal 2012 third-quarter earnings Wednesday that showed an inability to pursue higher pricing to offset increased input costs. Though we weren’t pleased with the results, we are sticking with our $39 per share fair value estimate.
The firm’s net sales advanced 13% in the quarter, though most of this growth was driven by its International Yoplait acquisition. General Mills’ gross margin fell 260 basis points in the period, while the company’s segment operating profit rose a meager 1% as significantly higher input costs year-over-year (10%-11%) and more aggressive advertising initiatives weighed on performance. On a corporate level, operating profit fell over 2%, as its operating margin contracted 170 basis points from last year’s quarter. Adjusted diluted earnings per share came in at $0.55, a penny less than the same quarter a year ago, but in-line with consensus expectations.
Looking ahead, General Mills reaffirmed its fiscal 2012 adjusted diluted earnings per share guidance of the range of $2.53 to $2.55, which it lowered from $2.59 to $2.61 per share in February. Though we expect the firm to hit this range, we continue to believe General Mills will experience reduced gross margins for some time to come, as its pricing initiatives fall short of offsetting rising input costs. We remain on the sidelines with respect to the firm’s shares.