General Mills Beats Expectations, but Its Profit Test Remains

General Mills beat quarterly forecasts, but organic sales were flat and margins narrowed. Investors need to see whether new products and cost savings can deliver profitable growth.

General Mills delivered a better quarter than analysts expected. Sales reached $4.39 billion, above forecasts, while adjusted earnings of 75 cents a share also beat estimates. Yet the figures leave investors with a question: can the Cheerios maker restore profitable growth?

The pressure beneath the beat

Reported sales fell 3%, partly reflecting the earlier sale of its US yogurt business. Organic sales, which strip out such changes, were flat. Adjusted earnings per share fell 13% from a year earlier, and adjusted gross margin declined to 33.3% as costs rose.

That combination matters more than the earnings beat alone. General Mills is holding on to sales in a difficult market, but it still needs to sell more of its remaining products and protect the profit made on each sale.

The company expects at least $750 million in savings this fiscal year and has kept its full-year outlook. Its organic sales forecast ranges from a 1.5% decline to 0.5% growth, showing that management is still planning for a subdued market.

The next earnings reports should show whether new products and cost savings can lift both sales and margins. Until then, this quarter looks better than feared, while the recovery remains unproven.