General Mills Inc. (GIS) shares climbed Wednesday after the company delivered a better-than-expected second quarter, proving that sometimes you can have your cake and eat it too—even when sales are sliding.
The food giant reported adjusted earnings per share of $1.10, comfortably beating the analyst consensus of $1.03. Quarterly revenue came in at $4.86 billion, ahead of the Street's $4.781 billion estimate, even though that represented a 7% decline from last year. Organic net sales dipped 1%, weighed down by unfavorable pricing and mix.
"Our team continued to execute exceptionally well in a volatile operating environment, delivering results ahead of our expectations in the second quarter," said Chairman and CEO Jeff Harmening.
A Mixed Bag Across Segments
The performance varied considerably across General Mills'} business units. North America Retail, the company's largest segment, saw sales tumble 13% to $2.9 billion. North America Foodservice wasn't much better, dropping 8% to $582 million.
On the brighter side, the North America Pet segment jumped 11% to $660 million, while International sales climbed 6% to $729 million. The international organic growth of 4% was driven by strong performance in Brazil, China, India, and North Asia.
The joint venture picture was less rosy. Cereal Partners Worldwide saw constant-currency sales fall 1%, while Häagen-Dazs Japan stayed flat. More concerning, joint ventures posted a $60 million after-tax loss, a sharp reversal from last year's $30 million profit. The culprit? An $85 million non-cash goodwill impairment related to CPW Australia.
Investing Through the Pain
Here's where the story gets interesting. General Mills is essentially choosing short-term pain for long-term gain. The company is pouring money into brand investments—product innovation, packaging upgrades, marketing campaigns, and omnichannel execution.
Management says these investments are already paying dividends, supporting organic volume growth in North America Retail and strengthening competitiveness across segments. The company expects sales from new products to surge 25% in fiscal 2026 as these efforts gain traction.
The early results look promising. Management noted that remarkability investments are lifting pound volume and market share, with dollar growth expected to follow once the initial pricing adjustments work through the system.
Margin Pressure Mounting
But there's no free lunch in the food business. Adjusted gross margin contracted 150 basis points to 34.8% of net sales, squeezed by higher input costs. Adjusted operating profit fell 20% in constant currency to $848 million, dragged down by lower gross profit dollars.
The company's cash position also thinned considerably, ending the quarter with $683.4 million versus $2.292 billion a year ago.
Full-Year Guidance: Steady as She Goes
Despite the margin pressure, General Mills reaffirmed its fiscal 2026 outlook. The company expects organic net sales to range from down 1% to up 1%. Adjusted operating profit and adjusted diluted EPS are projected to decline 10% to 15% in constant currency.
Management is being refreshingly candid about the headwinds. They expect higher growth spending, rising input cost inflation (including tariffs), and normalized incentive expenses to overwhelm cost savings and efficiency gains. Even with an extra 53rd week of sales this fiscal year, margins will remain under pressure.
The profit hit also reflects the impact of yogurt divestitures and unfavorable trade expense timing, along with the heavy brand investments.
The Long Game
Harmening and his team are essentially asking investors to trust the process. They're betting that aggressive brand investments today will reignite volume-led organic sales growth and position the company for stronger performance down the road.
It's a calculated gamble. Management acknowledges these investments, combined with the yogurt divestitures and normalized incentive expenses, will pressure fiscal 2026 profit and EPS. But they believe it's the right move to support long-term growth.
Investors seemed willing to give them the benefit of the doubt. General Mills shares gained 1.04% to $47.51 in premarket trading Wednesday, suggesting the market appreciates a company willing to invest in its future even when the present looks challenging.
