MINNEAPOLIS _ General Mills reported another quarter of declining sales Tuesday while management adjusts its model to deliver on the new standard for success set by Wall Street for the food industry.
Its profit fell 9 percent and sales dropped 7 percent for the September-to-November period, the second quarter in its fiscal year. Executives lowered their outlook for the second half of the fiscal year.
And while company leadership is not happy with this decline in sales, which must be reversed for long-term sustainability of the business, they are listening to the company's investors who are currently more interested in seeing growth in profit margins earned through leaner operations.
The tension surfaced during a call Tuesday with some of the analysts who follow the company the closest. Chief executive Ken Powell was asked how important his team's 20 percent operating profit margin goal was and whether it was limiting the company's ability to invest in products and spur sales.
"As we look at the environment that has been slower growth, and listening pretty close to our investors, there really has been a very, very high interest in margin, so we felt it was important we listen to that," said Powell.
In an interview, Powell said that because the entire food industry is seeing stagnant growth, investors has reduced expectation of high year-over-year increases for these major food producers, redirecting their focus to larger profit margins often achieved through cost-cutting or other supply chain efficiencies.
Meanwhile, the maker of Cheerios cereal, Betty Crocker cake mixes and Progresso soups continues to grapple with realigning the business to changing consumer preferences.
Its Yoplait yogurt products fell 17 percent in the U.S., the main contributor to the drop in U.S. retail sales, which is the company's largest business segment. General Mills, headquartered outside the Twin Cities, is renovating 60 percent of its yogurt portfolio after suffering significant market-share loss to new entrants like Chobani and other Greek-yogurt brands. But it has yet to benefit from those product changes.
Jeff Harmening, president and CEO-heir apparent, said the company expects a slight improvement in the second half of this year and "by fiscal (year) 2018, it should get better still." He stressed the importance of increasing its innovation efforts, including promoting new organic yogurt products or reinvented existing ones.
"We have a good pipeline of innovation that we will continue to unveil," Harmening told the Star Tribune.
The company is making progress toward its adjusted operating profit margin goal of 20 percent, set for 2018. The company reported a 19.6 percent adjusted margin expansion in the most recent quarter _ in part due to a reduction in advertising and marketing spending, which may rise again in the second half of the year after some missteps in that area.
This fall, General Mills struggled to find the right balance between these future-looking investments and cutting costs.
In an effort to exhibit cost discipline, the company reduced its spending on marketing too much in certain areas last quarter, Powell said.
"We think it is very clear that taking a very disciplined approach to spending is the right thing to do," Powell said. "But as we look back at the second quarter, we think there are places we cut too far, and we will add back and correct those areas."
Harmening believes they can spend more on marketing gluten-free Cheerios and their removal of artificial colors and flavors from its cereals, which are important changes that have been well-received.
"We've been saying for quite some time that a pullback in brand spending has artificially inflated profit levels across the industry, including at peers Campbell Soup, Kraft Heinz, and ConAgra Brands, among others, and we viewed recent outsize profit gains as unsustainable," Erin Lash, an analyst at Morningstar Inc., wrote after the earnings call. "In our view, firms throughout the space will need to bolster brand spending to offset intense competition, a sentiment to which General Mills provided further credence."
The company's ability to grow sales while trimming costs is paramount to its ability to survive in this competitive industry. For several years, Powell said, this leadership team has been monitoring two things he feels are impacting food makers the most: changing consumer attitudes toward food and an increase in activist interest in food and beverage companies.
"We are very aware of both of those things," Powell said. "In any era of consolidation, the way to go forward is to be lean and be profitable and to perform. And that's been our focus."
Renewed speculation on Wall Street has recently zeroed in on Mondelez International and General Mills as potential takeover target of Brazilian private-equity firm 3G Capital, which orchestrated the Kraft Heinz merger, along with Warren Buffett's Berkshire Hathway, nearly two years ago. 3G tends to target companies it feels it can extract more cost-savings from and has said it intends to further consolidate the food industry.
General Mills earned $482 million, or 80 cents per share, in the three months ended Nov. 27. Sales amounted to $4.1 billion.
In light of a disappointing first half to its 2017 fiscal year, executives said they now expect full-year sales to drop 3 percent to 4 percent and operating profit to grow at a more modest 2 to 4 percent. They maintained a target of adjusted earnings per share growth of 6 percent to 8 percent.
The company's shares, which hit a record high in April and are still up for the year, fell 2.6 percent in trading Tuesday to close at $61.45.
