It has been about a month since the last earnings report for General Mills (GIS). Shares have lost about 0.5% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is General Mills due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
General Mills Tops Q1 Earnings, Misses Sales Estimates
General Mills delivered first-quarter fiscal 2019 results, wherein earnings marked its second straight beat but sales missed estimates for the third consecutive time.
The company’s adjusted earnings per share of 71 cents came ahead of the Zacks Consensus Estimate of 64 cents. On a constant currency (cc) basis, earnings remained flat year over year. The bottom line was fueled by an increase in adjusted operating profit and reduced effective tax rate, which was somewhat negated by escalated interest costs, increased shares outstanding and a one-time accounting charge related to Blue Buffalo’s buyout.
Including one-time items, earnings came in at 65 cents per share, reflecting a decrease from 69 cents in the year-ago quarter.
Net sales of $4,094 million advanced 9% year over year, while it fell short of the Zacks Consensus Estimate of $4,120 million. Organic sales witnessed a modest improvement fueled by organic net price realization and mix in all segments, somewhat countered by reduced organic volumes across North America Retail, Convenience Stores & Foodservice, and Europe & Australia units. Notably, this marked the company’s fourth straight quarter of organic sales growth.
Adjusted gross margin contracted 160 basis points (bps) to 33.6% due to input cost inflation and a one-time accounting charge related to Blue Buffalo’s buyout. This was partly compensated by improved net price realization and mix along with productivity gains.
Adjusted operating margin also declined 80 bps to 15.7% owing to the one-time purchase accounting charge.
North America Retail: Revenues from this segment came in at $2,387.8 million, registering a decline of approximately 2.1% from the year-ago quarter. This was mainly due to low contributions from volume, partially countered by gains from net price realization and mix. Further, organic sales in the region slipped 1%.
Moreover, the segment noted 4% decline in U.S. Snacks alongside a 2% decline in U.S. Meals & Baking and U.S. Yogurt business, each. Also, sales in the Canada operating unit declined 2% at cc. Nevertheless, the U.S. Cereal business unit inched up 1%.
Convenience Stores & Food Service: Revenues were up almost 3.6% year over year at $ 463.2 million. Growth in the Focus 6 platforms including frozen meals and snacks had a positive effect on the segment’s results. Organically, sales were up 4%.
Europe & Australia: On a year-over-year basis, the segment’s revenues improved close to 1.8% to $500.7 million, thanks to benefits from net price realization and mix. Further, sales rose 1% on an organic basis. Increased sales of Fibre One and Nature Valley snack bars along with Haagen-Dazs ice creams aided the segment’s performance in the quarter.
Asia & Latin America: Revenues increased almost 1.8% to $399 million, driven by volume growth and gains from net price realization and mix. This was somewhat offset by unfavorable currency movements. Further, sales rose 8% on an organic basis.
Pet Segment: Revenues came in at $343.3 million. The segment depicts growth of 14% on a pro-forma basis. The segment gained from volume growth as well as positive net price realization and mix. Moreover, sustained expansion in Drug, Food and Mass channels combined with growth in e-commerce also benefitted the pet category. These upsides were partially negated by softness in the Pet Specialty channel.
Other Financial Aspects
The company ended the quarter with cash and cash equivalents of $432.9 million, long-term debt of $12,665.1 million and total shareholders’ equity of $6,225.1 million.
General Mills generated $607.4 million as net cash from operating activities during the quarter, which reflected 3% growth from the year-ago period. The company made capital investments worth $113 million.
Further, General Mills paid dividends of roughly $294 million.
Constant-currency sales from joint ventures of Cereal Partners Worldwide and Haagen-Dazs Japan went down 2% and 14%, respectively in the first quarter.
Fiscal 2019 Guidance
General Mills continues to witness organic sales growth, on the back of solid innovation, effective marketing and in-store execution. Also, the company remains on track with Blue Buffalo’s transition and envisions double-digit top- and bottom-line growth from this business, in fiscal 2019. This guidance excludes charges related to the buyout. Management remains focused on its Consumer First strategy as well as working toward its global growth plans to enhance sales momentum.
All said, the company reiterated its guidance for fiscal 2019 and expects organic sales growth in the range of flat to increase 1%. Including Blue Buffalo’s buyout, net sales are anticipated to rise 9-10%.
Adjusted operating profit (on a constant-currency basis) is expected to jump 6-9% year over year. Finally, the company envisions adjusted earnings per share (constant currency) growth in the range of 3% decline to flat compared with the fiscal 2018 figure of $3.11.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, General Mills has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, General Mills has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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