General Mills Inc. (GIS:US) reported fiscal fourth-quarter earnings that trailed analysts’ estimates and said it began a review of its North American manufacturing and distribution network as part of a wider effort to reduce costs.
The maker of Cheerios cereal said the cost-cutting plan is expected to generate pretax savings of $40 million in fiscal 2015, and will have additional savings in 2016, according to a statement today.
Chief Executive Officer Ken Powell said sales and operating profit were “disappointing” in the last fiscal year as promotional spending in developed markets was less effective than planned. Revenue in the quarter ended May 25 dropped 2.9 percent to $4.28 billion.
General Mills fell (GIS:US) 3.6 percent to $51.76 at the close in New York, the biggest decline since Feb. 17, 2012. The stock has gained 3.7 percent this year.
The cost savings at General Mills will likely go into product development and market support, Erin Lash, an analyst at Morningstar Inc. in Chicago, said today in a phone interview. The question is whether General Mills will lower prices to drive sales volume or if it will bring in higher cost products popular with consumers, she said.
“By taking costs out of the business -- we’re not expecting that to drive material margin improvement,” said Lash, who has a hold rating on the shares. “We’re expecting them to reinvest that back into the brand.”
Adjusted earnings per share in the quarter were 67 cents, the Minneapolis-based company said. Analysts projected 72 cents, the average of estimates compiled by Bloomberg.
“The results came in slightly less than expectations, but from our view the shares are more or less valued at the current price,” Lash said.
Earlier this year Warren Buffett of Berkshire Hathaway Inc. (B:US) said he’s looking for “elephants” or large acquisitions. General Mills may fit the bill. After Berkshire’s purchase of H.J. Heinz Co. last year, a shareholder said General Mills could be a possibility because both brands are recognizable and sell their products in similar stores.
“General Mills makes a lot of sense,” Jeff Matthews, the author of “Warren Buffett’s Successor: Who It Is and Why It Matters,” said in a phone interview in February. “It’s another kind of sleepy, Heinz-type business that has a lot of potential. The distribution channels really overlap.”
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