Hiccups in General Mills' international business to blame for lower quarterly sales

For once, it wasn't yogurt's fault or cereal's fault.

A frustrated retailer in France, fewer visitors to ice cream shops in China and other international hiccups drove sales at General Mills downward this summer.

The Golden Valley-based food maker experienced a 2% drop in sales during its latest quarter, a miss for executives who have made a priority of getting the company growing again.

"The reasons our sales declined were really outside the U.S., and a little in our food-service business," said Jeff Harmening, chief executive of General Mills. "A lot of the things that happened in the first quarter are within our control, which is why we are confident we can fix it."

While the company reported a 33% jump in profit — to $521 million for the quarter ended Aug. 25 — a big part of the gain was because it did not have a one-time $50 million expense that it did in the year-ago quarter. Its adjusted profit amounted to 79 cents a share, beating investors' expectations by 2 cents.

Investors are looking for General Mills to deliver on its promise of getting sales back to true growth, something executives have said they need to do this year. For years, General Mills struggled to slow the sales bleed in U.S. cereal and yogurt, and executives relied on cost-cutting measures to maintain profit levels.

Today, their long-term growth plans hinge on the company's ability to deliver consistent organic sales growth, an industry term for growth achieved through existing products rather than relying on acquisitions to boost numbers.

While the latest quarter was mixed, executives reaffirmed their outlook of growing organic net sales 1 to 2% and increasing earnings per share 3 to 5% during the new fiscal year that began in June.

Harmening recently told the Star Tribune that much of General Mills' sales growth will come from its fast-growing pet-food category, which the company recently bought into through the $8 billion acquisition of Blue Buffalo Pet Products in 2018.

Investors are keeping tabs on that line's growth rate as an indicator of General Mills' overall progress toward its goals. Pet-food sales grew 7% to $368 million during the latest quarter.

"Our strongest organic-growth performance with Blue Buffalo [this year] will be in the second and third quarter," said Don Mulligan, the company's chief financial officer.

Pet food only accounts for about 10% of revenue and General Mills is counting on its North America retail segment, which accounts for about 60%, to do better. Harmening said improvements in U.S. snacks and cereal will be especially important in the company hitting its long-term growth forecast.

Net sales in North America were flat during the first quarter. Snack sales were down 1% while cereal was up 1%. U.S. yogurt sales haven't fully recovered, but its 2% sales decline in the quarter mirrors last year's results and is a marked improvement over the double-digit declines in previous years.

After a decade of posting solid sales growth in its snack bars category, the company stumbled in its 2019 fiscal year by failing to create strong innovation on its Nature Valley bars and missing a shift in diet trends with its Fiber One bars.

The company adjusted this summer, introducing new Nature Valley products, such as a wafer bar. It also reformulated its Fiber One bar in a way that lowered its Weight Watchers points from five to two. Both products are showing promising early results, Harmening said.

General Mills grew sales in its U.S. cereal business on the strength of new products.

"We have the top five new products in the cereal category right now," Harmening said. "I'm not sure the last time that happened, but it's been a while." Those new cereals are Blueberry Cheerios, Cinnamon Toast Crunch Churros, Fruity Lucky Charms, Chocolate Toast Crunch and Maple Cheerios.

Its Europe and Australia segments' sales dropped 9%, with France presenting a particularly tough retail environment. Inflated dairy prices forced General Mills to raise prices on its yogurt products there, which angered one of its large retailers. The company lost some distribution as a result.

Meanwhile, sales in Asia and Latin America businesses tumbled nearly 10% during the quarter due to decreased foot traffic in the company's Haagen-Dazs ice cream shops in China and lower inventory in Brazil.

General Mills' convenience stores and food-service business — which serves gas stations, schools and hospitals — took a hit on lower flour sales due to index pricing.

Kristen Leigh Painter • 612-673-4767