General Mills Inc. already owns Green Giant. Now it is trying to become one.
The packaged-goods behemoth is expanding its natural and organic food sales by nearly 70% through the $820 million acquisition of Annie's Inc. BNNY +0.11% The fact it felt the need to do so at three times its own earnings multiple speaks to its own frustrating lack of growth.
Expect more frustration when it unveils fiscal first-quarter results Wednesday. Analysts polled by FactSet forecast earnings of 69 cents a share for the period ended in August, down a penny from a year earlier. Sales are expected to be essentially flat, much as they were for the fiscal year that ended in May, once acquisitions made during the prior period are excluded. Operating income at the company's U.S. retail food operations, its largest segment by revenue, fell by 3% in 2014.
Selling consumer staples has gone from a ho-hum business in the past decade to a bad one more recently. Since fiscal 2004, operating income has grown at a compound annual rate of 3.2%. Earnings per share have expanded at a faster clip thanks to share buybacks. But those are unlikely to grow at the same pace unless General Mills pumps up its anemic free cash flow.
Appealing to health-conscious consumers isn't a new idea, of course. The company said that U.S. organic-food sales have been growing at a compound annual rate of 12% in the past decade—far faster than the overall packaged-foods market. Since 2000, General Mills made four other acquisitions that fall broadly into that category. Sales remain minor compared with the overall business, though, as it contributed only about 2.5% to revenue.
Bolting on yet another company won't move the needle much. And "bolting" is the operative word. Annie's will retain its headquarters and management—something that flies in the face of austerity elsewhere at General Mills. Its late-June announcement of a cost-cutting initiative is a sign of the times in the food business as companies are having difficulty growing sales or passing on commodity cost increases.
Pumping up growth has a certain appeal, but the result of trimming its waistline is what investors should be watching at General Mills.