Like several other food players, General Mills, Inc. GIS is benefiting from increased demand trends amid the coronavirus-led increased at-home consumption. Such upsides bolstered most of the company’s segments in first-quarter fiscal 2021, wherein both top and bottom lines surged year over year and beat the Zacks Consensus Estimate. Encouragingly, second-quarter at-home food demand is expected to remain high compared with the pre-pandemic levels, though declines in away-from-home food demand are likely to weigh on the Convenience Stores & Foodservice segment.
Nonetheless, the company’s shares have gained 3.2% since its earnings release on Sep 23. In fact, this Zacks Rank #3 (Hold) stock has rallied 11.7% year to date against the industry’s decline of 5.4%. Also, analysts seem optimistic about the stock’s performance as the consensus mark for fiscal 2021 bottom line has climbed almost 2% to $3.60 over the past seven days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Let’s delve deeper.
Robust Demand Aids
General Mills’ first-quarter fiscal 2021 results benefited from broad-based market share gains from rising demand due to increased at-home consumption amid the coronavirus pandemic. Adjusted earnings increased 27% year over year on a constant-currency (cc) basis. Further, net sales of $4,364 million advanced 9% year over year and surpassed the Zacks Consensus Estimate of $4,176 million. Also, organic sales increased 10% year over year on the back of higher pound volumes stemming from increased at-home demand amid the pandemic, favorable net price realization and mix.
General Mills, Inc. Price, Consensus and EPS Surprise
General Mills, Inc. price-consensus-eps-surprise-chart | General Mills, Inc. Quote
During its earnings call, the company stated that at-home demand remained higher than pre-pandemic levels through the first quarter, though the trend has moderated sequentially owing to the gradual easing of restrictions and elevated restaurant reopening. Nonetheless, second-quarter at-home food demand is expected to remain high compared with pre-pandemic levels. This includes expectations of high-single-digit total retail sales growth in the North America Retail categories. Other food stocks gaining from rising demand trends include Conagra Brands CAG, TreeHouse Foods THS and Flowers Foods FLO, to name a few.
Focus on Key Strategies
General Mills is on track with its three core priorities for fiscal 2021, which include competing efficiently, boosting efficiency to fuel investments and reducing leverage. With regard to the first priority, the company expects fiscal 2021 sales growth to be backed by elevated demand and solid execution. However, sales comparisons are likely to reflect adverse impacts from an additional week and an extra month of Pet segment results in fiscal 2020. As part of boosting efficiency, management expects adjusted operating profit margin in fiscal 2021 to be roughly in-line with that in fiscal 2020. It expects full-year margins to benefit from Holistic Margin Management savings as well as volume leverage. Finally, management expects to reduce its net-debt-to-adjusted-EBITDA ratio to less than 3.2x by the end of fiscal 2021.
Hurdles Likely to be Offset
Sales in the Convenience Stores & Foodservice segment have been declining for a while now. During first-quarter fiscal 2021, segment revenues declined 12% to $391.6 million due to a significant reduction in demand for away-from-home food amid the coronavirus outbreak. Though results improved from the previous quarter, traffic remained below the year-ago period levels in core channels such as restaurants, convenience stores and lodging. Management expects declines in away-from-home food demand, together with other pandemic-led macroeconomic hurdles, to negatively impact fiscal 2021 results.
Apart from this, General Mills is encountering escalated cost challenges. SG&A expenses increased 6% in the first quarter of fiscal 2021. Further, it saw input cost inflation of 3% and incurred additional costs to cater to the elevated demand, including external manufacturing. Also, the company saw high coronavirus-related costs for health and safety, and costs associated with additional capacity. We believe that the persistence of these factors is a threat to the company’s profits.
Nonetheless, General Mills’ robust saving endeavors and other abovementioned upsides are likely to help it counter these challenges.
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