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Financial Analysis of GENERAL MILLS

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Financial Analysis of GENERAL MILLS
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Netra Shetty
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Financial Analysis of GENERAL MILLS - February 8th, 2011

General Mills, Inc. (NYSE: GIS) is an American Fortune 500 corporation, primarily concerned with food products, which is headquartered in Golden Valley, Minnesota, a suburb of Minneapolis. The company markets many well-known brands, such as Betty Crocker, Yoplait, Colombo, Totinos, Jeno's, Pillsbury, Green Giant, Old El Paso, Häagen-Dazs, Cheerios, Lucky Charms and Wanchai Ferry. Their brand portfolio includes more than 100 leading U.S. brands and numerous category leaders around the world.[4]

General Mills (NYSE: GIS) is one of the largest packaged food producers in the world, with nearly $14.8 billion in sales in 2010.[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 70% of sales[2], but its international segment, helped by a joint venture with Swiss food giant Nestle SA, is growing fast as the company now operates in more than 130 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.[3] 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.[4]

In the summer of 2010, French private equity firm PAI Partners announced their intention to sell their 50% share in Yoplait Yogurt, with the sale occurring in December. General Mills is expected to bid for the dairy product manufacturer, however Groupe Lactalis, Europe's largest dairy group, Nestle (NSRGY), Mexico's Grupo Lala, and China Mengniu Dairy may also bid.[5] Groupe Lactalis made an unsolicited bid of $1.96 billion for the entire company that was rejected for being too low and because Sodiaal, the dairy cooperative that owns the other 50% of Yoplait, doesn't intend to sell its share.[6] General Mills has a vested interested in purchasing Yoplait because the company already owns the US distribution rights for the brand, which it would like to retain as a steady source of income.[7]

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.

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.

Net sales (Billions)
Segment 2005 2006 2007 2008 2009 2010 % sales
U.S. Retail $7.7[8] $8.0[9] $8.5[10] $9.1[11] $10.1[12] $10.3[13] 70%
International $1.7[14] $1.8[15] $2.1[16] $2.56[11] $2.6[17] $2.7[18] 18%[19]
Bakeries and foodservice $1.7[20] $1.7[21] $1.8[22] $2.02[11] $2.05[23] $1.8[24] 12%[25]
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.[26] 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.[27] 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.[27] Additionally, General Mills faced an adverse tax decision which resulted in an additional $53 million income tax expense in 2009.[28]


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.[3] 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.[3] 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%.[3]

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.[29] 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.[29]

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.[30] 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%.[31] 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.[32] The decrease in Bakeries and Foodservices was caused by a 10% decrease in volume, 8% of which was the result of divested product lines.[33]

Q3 2010

In the third quarter of 2010, General Mills posted revenues of $3.629 billion, an increase of 3% from the previous year; net income increased 15% to $332.5 million.[34] Overall pound volume for the quarter was flat, however this is in spite of losing a point because of discontinued products and in spite of a product mix in which heavier items such as soup and canned vegetables decreased but lighter items, such as cereals, increased significantly.[35] Net sales for U.S. Retail increased 3% based on 6% growth in cereals and 15% growth in snacks. The segment's baking products revenue decreased 8% primarily as a result of decreased flour prices from last year.[36] Favorable foreign currency exchange rates added 8% to International segment revenues, which ended the quarter with an 11% increase in revenues. Sales in Europe, Canada, and Asia/Pacific were up 13%, 17%, and 18% respectively; the discontinuation of bread and pasta brands in Brazil combined with a weak exchange rate in Venezuela lead to a 13% decrease in revenues from Latin America.[37] Net sales for Bakeries and Foodservice segments decreased 10% in the quarter with volume declining 5% (discontinued product lines lowered volume by 9%) and a 5% decrease in prices tied to commodity indexes (mainly wheat) which have decreased since last year.[38] Discounting the divested products, volume for this segment would have increased ahead of overall industry trends for the quarter.[39]

Q4 2010

In the fourth quarter of 2010, General Mills posted revenues of $3.57 billion, down 2% from the previous year; net income fell 41% to $211.9 million.[40] Volume for the quarter was similar to Q4 2009, however one less operating week and divested product lines accounted for 7% of the decrease in revenues.[41] US Retail sales decreased 2% during the quarter with an 8% increase in volume[42] being offset by a 7% decline as a result of having one less week in the quarter and a 14% increase in advertising expenses. International sales grew 4% as a result of a 3% increase in volume and favorable exchange rates, which were able to offset a 2% decrease in sales resulting from divested products and one less week.[43] Continuing the trend of the past few quarters, Bakeries and Fooservice revenues decreased 12% due to a 8% decrease in volume and the shorter quarter[44]; however, volume actually increased excluding the loss of divested products.[45] The company's joint venture, Cereal Partners Worldwide, generated $15 million after tax, an increase of 25%, which reflected net sales growth of 10% and favorable currency exchange rates contributing 9%.[46] Overall advertising costs for the quarter increased 10%, which followed a double-digit increase in Q4 2009 as well.[47]

Q1 2011

In the first quarter of 2011 General Mills posted revenues of $3.5 billion, an increase of 1.5% from Q1 2010; net income increased 12.2% to $472 million. Operating income increased by 9.7% to $760 million.[48] Increases in volume contributed 2% to net sales growth while unfavorable foreign exchange rates decreased net sales by 1%; pricing for the quarter remained unchanged. US Retail sales grew 2% in the quarter, spurred by a 4% increase in Big G cereals, 4% growth for Yoplait, and 15% growth for Small Planet Foods. Pillsbury's revenue fell 3% due to a decrease in refrigerated cookie dough sales. The company's operating profit fell 3% as a result of supply chain expenses and a 6% increase in advertising costs.[49] International sales were flat for the quarter, reflecting an 11% increase in Asia/Pacific and a 19% decrease in Latin America. Unfavorable exchange rates in Europe and Latin America depressed revenues by 2% and 19% respectively. Haagen-Daazs and Wanchai Ferry products in China were the major engine behind Asia/Pacific's growth in the quarter. The segment's operating profit declined by 1%, however this included a 17% increase in advertising costs.[50] The company's Bakeries and Foodservice segment's revenue was flat for the quarter with a 15% increase in convenience store sales offset by a 3% decrease in sales to bakeries and national restaurants. Volume for the segment increased 3% despite a 2% loss due to divested product lines; the increase in volume accounted for 11% growth in the segment's net income.[51]

Q2 2011

In the second quarter of 2011, General Mills’ total revenues were $4.07 billion, an increase of 1% from Q2 2010; net income for the quarter increased more than 8% to $613.9 million. Operating income for the quarter decreased by 6% to $822.9 million.[52] Total volume for the quarter increased by 3%, driven by 8% growth in the International segment and 3% growth in U.S. Retail. The increase in volume was partially offset by a 2% decrease in pricing. [53] U.S. Retail sales were essentially flat with the increase in volume counteracted by decreases in pricing. Cereal volume fell by 2%, however this followed a 10% increase in Q2 2010. Pillsbury sales decreased by 3% while Yoplait sales increased 4%; the largest growth came from Small Planet Foods, which increased sales by 15%.[54] International sales grew by 4% with slight increases in Europe and Canada augmenting 15% growth in Asia/Pacific; Latin America sales fell by 11%. Haagen-Dazs ice cream drove growth in France, the UK, and China; the decrease in Latin America sales was largely the result of Venezuela’s currency devaluation in 2010. [55] Net sales for the Bakeries and Foodservice segment grew by 3% driven by higher pricing, which was slightly offset by a 1% decline in volume. Convenience store net sales increased by 10% with bakeries and national chain accounts adding an additional 3%.[56]

U.S. Retail (70.8% of Revenues, 83.6% of Operating Income)[57]
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.[58]

International (18.3% of Revenues, 7.7% of Operating Income)[59]
General Mills' international unit generates 17 percent of the company's sales[60]. 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[61].

Bakeries and Foodservice (12.0% of Revenues, 8.7% of Net Income)[62]
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 was hit the hardest by the global recession as customers reduced their orders in light of the ongoing downturn in the restaurant industry.

Ongoing Restaurant Industry Weakness
In September 2010, visits to restaurants fell for the eighth consecutive quarter.[63] Restaurant visits have consistently declined for nearly every type of restaurant (except for fast-food), and restaurant operators are becoming increasingly pessimistic about their prospects in the near future.[64] As a supplier of restaurants, the decreased number of visits directly affects this segment of General Mills'. Other companies that serve the restaurant industry, such as Sysco (SYY), have suffered a similar fate as collateral victims of the weak restaurant industry. This unit's eventual recovery depends on future increase in restaurant traffic.

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.[65]



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 23% of total sales in 2010, including 30% of sales at the U.S. retail division.[66] 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 the segment's sales in 2010 and the five largest customers in bakeries and foodservice made up 45 percent of total sales.[67] Because these large customers are so important to sales, General Mills 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[68] 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.

Danone, the maker of Dannon yogurts, is competing with General Mills in its fastest growing business—yogurts. Yoplait controlled 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.[69]

Company Comparison
Company Net Revenue (in millions) International Rev as % of sales Gross Margin %
General Mills $14,797 18% 39.7%
Kellogg $12,575 32.3% 42.9%
Kraft $40,386 41.4% 36.2%
Danone $20,938 N/A 55.0%

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 Ralcorp Holdings (RAH)) with a combined 30 percent.[70] 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.
Latest Full Context Quarter Ending Date
2010/11

Gross Profit Margin
42.5%

EBIT Margin
13.2%

EBITDA Margin
20.9%

Pre-Tax Profit Margin
10.5%

Interest Coverage
4.9

Current Ratio
1.1

Quick Ratio
0.5

Leverage Ratio
3.3

Receivables Turnover
11.8

Inventory Turnover
5.1

Asset Turnover
0.8

Revenue to Assets
0.8

ROE from Total Operations
28.9%

Return on Invested Capital
14.2%

Return on Assets
8.9%

Debt/Common Equity Ratio
1.04

Price/Book Ratio (Price/Equity)
3.99

Book Value per Share
$8.87

Total Debt/ Equity
1.25

Long-Term Debt to Total Capital
0.51

SG&A as % of Revenue
21.6%

R&D as % of Revenue
0.0%

Receivables per Day Sales
$31.60

Days CGS in Inventory
71

Working Capital per Share
$0.45

Cash per Share
$0.89

Cash Flow per Share
$3.29

Free Cash Flow per Share
$0.66

Tangible Book Value per Share
$-7.45

Price/Cash Flow Ratio
10.8

Price/Free Cash Flow Ratio
53.8

Price/Tangible Book Ratio
-4.75

Most recent data

5-Year Averages
Return on Equity
22.8%

Return on Assets
7.0%

Return on Invested Capital
13.0%

Gross Profit Margin
40.6%

Pre-Tax Profit Margin
14.3%

Post-Tax Profit Margin
9.5%

Net Profit Margin (Total Operations)
9.5%

R&D as a % of Sales
0.0%

SG&A as a % of Sales
20.7%

Debt/Equity Ratio
0.75

Total Debt/Equity Ratio
1.17
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Re: Financial Analysis of GENERAL MILLS - September 30th, 2012

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Re: Financial Analysis of GENERAL MILLS - September 30th, 2012

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Re: Financial Analysis of GENERAL MILLS - September 30th, 2012

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