Nature Valley and Fiber One snacks proving problematic

Nature Valley and Fiber One snacks proving problematic

General Mills admitted it has work to do on getting its US snacks business "back on track" as the category weighed on both its final quarter and full-year sales.

The US-based food major reported a 2% decline in annual sales for its North America retail division this week, its largest reporting unit, overshadowing positive growth on the group's top line. In snacks, the culprits were diet brand Fiber One and its Nature Valley healthy snacks line.

Chief executive Jeff Harmening had already pinpointed the two brands as problematic areas at the Bernstein Strategic Decisions Conference in New York in May, when he said Fiber One had been "trouble for us", while Nature Valley needed further product innovation.

On a post-earnings call with analysts on Wednesday (26 June), the CEO said: "Retail sales results continue to vary across geographies for snack bars. Fiber One declined significantly in fiscal 2019 as we fell out-of-step with modern weight managers. And on Nature Valley, our innovation and in-store execution did not meet our objectives." 

In its earnings commentary, General Mills said fourth-quarter sales for its North America retail segment dropped to US$2.34bn, and were also down 2% in organic terms. While the New York-listed firm's US snack sales fell, it added sales for its cereals, yogurts, and meals and baking units were in line with last year. 

It was a similar picture for the full year, when North America retail sales declined to $9.9bn, with the organic print down 1%. The earnings release stated: "In-market performance outpaced net sales results, as expected, with retail sales flat to last year in US Nielsen-measured outlets, and market share flat or growing in seven of the company's ten-largest US categories."  

Despite the negatives coming out of snacks, General Mills is confident it has the necessary resources to reverse the performance, with Jon Nudi, president of North America retail, due to make some related announcements at the company's investor day on 9 July. Meanwhile, it has launched a wafer bar under the Krispy Kreme brand, in which he said "the early returns are good". 

Nudi commented on this week's call: "We are very focused and frankly not satisfied with our performance on both Nature Valley and Fiber One and that's really what we need to turn around in the coming year. Nature Valley is really about getting back with meaningful innovation. And frankly, we didn't execute very well. 

"We missed some key windows from a merchandising standpoint back to school. On Nature Valley, we feel like we've got good plans in place after this year." 

For its Fruit Snacks brand, General Mills said it faced capacity restraints in the financial year just ended, an issue the company plans to fix "early in fiscal 2020". 

Harmening laid down three priorities for the new year: accelerate organic sales, improve the North America retail business, and execute on snacks.

"We'll improve growth in North America retail by maintaining momentum on cereal, continuing to improve US yogurt, and improving US snacks through sharpened execution, strengthened innovation and increased capacity on platforms where we were constrained a year ago," the CEO explained. 

An analyst posed a question on the call asking if the problems in snacks were structural given the drivers seemed to be worsening across Fibre One and Nature Valley, and suggested the Larabar fruit and nut line might be deteriorating too.  

Nudi responded: "Fibre One has been a structural issue over the last few years. Consumers and weight managers have really changed in terms of what they're looking for in terms of the macros of a product. So we just reformulated that product. It's flowing in the market now again, it's early days, but [there are] encouraging signs there as well. 

"So, what I'd tell you, we like Larabar. We don't believe there's a structural issue there. We love Epic [protein bars]. That has continued to grow nearly 50% this past year. It's really Nature Valley and Fiber One that we're focused on as we move into fiscal 2020." 

Harmening added: "I agree with Jon's perspective that it's not structural. It's some of the renovation execution. In fact to that end, we're confident we'll sequentially improve in the first quarter, in the first half of next year on snacks, and that will accelerate even further in the back half of the year."

Turning to this week's reported results, sales increased 7% for both the full year and the fourth quarter, to $16.9bn and $4.2bn, respectively.

Annual operating profit climbed 4% to $2.5bn and surged almost 34% for the final quarter. 

However, General Mills posted disappointing figures on net income and earnings per share.

Net income dropped 18% during the year to $1.8bn, and slumped 61% for the quarter to $570m. Diluted EPS for the two periods came in at $2.90 and $0.94, representing respective declines of 20% and 59%.

Still, on a more positive note, General Mills made some progress toward achieving its debt-reduction target as it seeks to cut leverage to 3.5 times by the conclusion of fiscal 2020. It lowered debt by $1.3bn to take the company's net debt-to-EBITDA ratio to 3.9 times.

"This was ahead of our initial fiscal 2019 goal and bolsters our confidence that we can reach our target," Harmening said.

Guidance for the new financial year is for General Mills to attain organic sales growth of 1% to 2%, and a 2% to 4% increase in adjusted operating profit in constant-currency terms. Diluted EPS are expected to rise 3% to 5%. 

"I am confident in our strategies and our plans for fiscal 2020," Harmening stressed. "In terms of brand-building support, what you will see is us increase our investment behind our brands, especially our priority brands and businesses. 

"We need to get snacks back on track. You'll see us invest behind some really good ideas on bars and on snacks, and then our accelerator platforms."