General Mills (GIS 57.73, +0.10, +0.2%) has some growth challenges on its hands, which is why some investors are bound to take exception to paying 18.7x estimated FY18 earnings for the food company. The stock, however, is up modestly today following the company's fiscal second quarter earnings report.
The report was nothing special.
Reported net sales increased 2% to $4.20 billion while organic net sales increased 1%. Adjusted earnings of $0.82 per diluted share were in-line with analysts' average expectation and down 4% from the prior year.
Despite the sales growth, there was a lack of bottom-line growth due largely to gross margin pressure and increases in advertising and media expense that crimped the company's operating profit. To that end, adjusted gross margin decreased 240 basis points to 34.4% and the adjusted operating profit margin fell 220 basis points to 17.4%.
The gross margin pressure was attributed to higher input costs and unfavorable trade expense phasing.
On a brighter note, organic net sales increased across all four operating segments on a mix of volume and price gains. Still, the tale of the operating challenges manifested itself in operating profit declines for all four operating segments.
General Mills was pleased with its sales improvement, but acknowledged that it still has more work to do to achieve its full-year goals.
Following a decline in profit in the first half of fiscal 2018, General Mills said it is confident that it will deliver profit growth in the second half of the year. That confidence has been aided by the sales growth, which has prompted General Mills to raise its fiscal 2018 organic net sales guidance to flat to down 1% from prior guidance of a decline of 1% to 2%.
That improved organic net sales growth outlook, though, didn't translate to increased profit guidance.
General Mills maintained its outlook for fiscal 2018 profit and EPS, which includes a view that constant-currency adjusted diluted EPS will increase 1% to 2% from the base of $3.08 earned in fiscal 2017. That outlook excludes any impact from tax reform legislation.
General Mills also noted that its adjusted operating profit margin for fiscal 2018 is expected to fall below year-ago levels, whereas before it was anticipating year-over-year improvement.
Including today's move, shares of GIS are down 6.5% year-to-date.