General Mills Inc.’s (GIS - Analyst Report) beat the Zacks Consensus Estimate for earnings in the second quarter of fiscal 2015. However, revenues missed the consensus mark as the consumer food company continues to battle weak demand in the U.S. and slowdown in some of the international markets.

Second-Quarter Earnings

Second-quarter adjusted earnings per share of 80 cents beat the Zacks Consensus Estimate of 76 cents by 5.3% — the first earnings beat after four back-to-back negative surprises. Earnings also beat management’s guided range of 75–77 cents issued last month. We believe that a shift in timing of expenses led to the earnings beat.

Earnings, however, declined around 4% year over year as sales and margins remained weak. On a constant currency basis, earnings were flat.

Adjusted earnings exclude restructuring costs and certain other items.

General Mills, Inc - Earnings Surprise | FindTheBest

Weak Revenues and Margins

Total revenue of the global consumer food company declined 3% year over year to $4.71 billion and missed the Zacks Consensus Estimate of $4.84 billion by 2.7%.

In constant currency terms, sales declined 1% as U.S. sales continued to lag, while growth slowed in key emerging markets. General Mills, like other food companies, is battling weak global food industry trends.

Price/mix added 1% to revenues, same as the last five quarters. Volumes declined 2%, same as the last quarter. Foreign exchange dragged revenues by 2%.

Adjusted gross margin declined 80 basis points (bps) to 34.9% due to lower sales and unfavorable product mix.

Advertising costs declined 9%. Despite lower advertising costs, adjusted operating margin declined 40 bps to 17% due to lower sales and gross margins. However, we note that both gross and operating margins improved from the previous quarter.

Segment Performance

U.S. Retail: Revenues from the U.S. Retail segment declined 4% year over year to $2.86 billion due to decline in both price/mix and volumes. Price/mix declined 1%, while volumes declined 3% as a result of weak food industry trends.

Sales growth in the Snacks and Yogurt divisions was offset by declines in the Big G cereal, Baking Products and Meals segments.

General Mills’ core cereals business continues to underperform due to weak category growth. Lower demand for cereals due to competitive pressures from alternatives including yogurt, eggs, bread and peanut butter are hurting category growth.

Despite lower advertising costs, segment operating profit declined 10% to $616 million due to weak revenues.

International: Revenues in the International segment declined 6% year over year to $1.32 billion because of currency headwinds. Foreign exchange had an unfavorable impact of 9% on net sales.

On a constant currency basis, international sales rose 3% driven largely by price/mix gains.

While price/mix added 3% to net sales growth, volumes remained flat.

Constant currency sales grew 14% in Latin America, 2% in Asia-Pacific and 4% in Europe. However, sales declined 7% in Canada due to business disruption.

Segment operating profit declined 2% on a constant currency basis to $134 million due to lower revenues.

Convenience Stores and Foodservice: On a year-over-year basis, the Convenience Stores and Foodservice segment’s quarterly revenues improved 4% to $530 million led by yogurt, frozen breakfast, cereals and snacks. Volumes declined 1%, while price/mix increased 5%. Segment operating profit rose 13% year over year to $96 million.

Fiscal 2015 Outlook Retained

Management retained the previously provided fiscal 2015 outlook, while pointing out that operating condition in the U.S. markets is becoming more challenging.

We would like to remind investors that management had slashed it revenue, operating profit and earnings per share guidance last month in response to continued weak food-industry trends in the U.S. and slowing growth in the key emerging markets.

Fiscal 2015 net sales are expected to increase at a low single-digit rate in constant currency, including the impact of the 53rd week and the September buyout of natural foods company, Annie’s Inc. The 53rd week is expected to add 2% to sales growth, while the Annie’s acquisition is expected to add $120 million to incremental sales.

Adjusted operating profit (constant currency) is expected to decline at a low single-digit rate.

Adjusted earnings per share (constant currency) are expected to grow at a low single-digit rate. Currency headwinds are expected to hurt earnings by 5 cents.

As previously indicated, General Mills expects to exceed the targeted $400 million of HMM (Holistic Margin Management program)supply chain savings in fiscal 2015.

In addition, General Mills is undertaking Project Century which includes streamlining the North American manufacturing and distribution operations targeting possible reduction in capacity and overhead costs. In addition, the company is making efforts to further reduce overhead costs which, coupled with Project Century, are expected to generate cost savings of $40 million in the second half of fiscal 2015, within $260 to $280 million in fiscal 2016 and exceed $350 million in fiscal 2017.

Stocks to Consider

General Mills carries a Zacks Rank #3 (Hold). Better-ranked stocks in the consumer staples sector include Monster Beverage Corp. (MNST - Analyst Report), Keurig Green Mountain, Inc. (GMCR - Analyst Report) and Dr Pepper Snapple Group, Inc. (DPS - Analyst Report). While Monster sports a Zacks Rank #1 (Strong Buy), Dr Pepper and Keurig carry a Zacks Rank #2 (Buy).