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Can General Mills Sustain Momentum on Pet Unit, Saving Plans?

Zacks Equity Research

General Mills, Inc. GIS is gathering momentum from key global strategies to improve sales, which are being hurt by weakness in the U.S. Snacks business (in the North America Retail segment) and the Europe & Australia segment. On the flip side, the company’s Pet segment is performing well. Also, General Mills is benefiting from robust saving efforts, which helped it witness improved margins in the first quarter of fiscal 2020.

These upsides have helped this branded consumer foods provider to stay in investors’ good books. In fact, this Zacks Rank #3 (Hold) stock has soared 36% so far this year, outpacing the industry’s growth of 13.1%.

Let’s take a closer look.



Factors Shaping General Mills’ Trajectory

General Mills is on track with key global growth strategies to drive sales. The company is focused on innovation, efficient customer marketing and strong in-store execution to sharpen its competitive edge. Additionally, it is concentrating on improving the U.S. Yogurt business, expanding presence in the emerging nations, stabilizing distribution channels and enhancing price mix.

General Mills focuses on driving growth across four differential global platforms — Haagen-Dazs ice cream, snack bars, Old El Paso Mexican food, and its natural and organic food brands.

The company is also working toward reshaping its portfolio via prudent buyouts and divestitures. To this end, the acquisition of Blue Buffalo Pet Products (concluded in fiscal 2018) has made General Mills one of the leading players in the pet food arena. Blue Buffalo, which forms General Mills’ Pet segment, manufactures and markets wholesome natural pet food items. The company’s first-quarter fiscal 2020 sales received partial support from the strong Pet segment.

Revenues at the Pet segment came in at $368 million in the last reported quarter, up 7% year over year on the back of volumes growth, favorable net price realization and mix impacts. Further, the expansion in the food, drug and mass network is a key driver for the company. Management earlier stated that it anticipates sales and operating profit at the Pet segment to grow significantly in fiscal 2020.

Will Hurdles Be Offset?

General Mills is witnessing weakness in the U.S. Snacks business for quite some time now, which is weighing on its North America Retail unit’s performance. In first-quarter fiscal 2020, revenues in the segment dipped 0.5% year over year due to softness in U.S. Snacks, U.S. Meals & Baking and Canada businesses. Additionally, the company’s Europe & Australia segment sales have been declining for the last few quarters due to a tough operating environment in France and weak trends in ice cream, among other factors. Nevertheless, the company’s solid sales-driving endeavors are likely to help it overcome these headwinds.

Apart from this, we expect its solid saving strategies to counter cost inflation and costs related to additional growth investments. Markedly, General Mills expects to achieve cost savings through increased efficiency, SKU rationalization, supply-chain optimization and continued expansion of zero-based budgeting across the business. Also, the company is on track with its Holistic Margin Management program, which is aimed at generating savings. In fact, savings from this initiative were well reflected in the company’s first-quarter fiscal 2020 results, wherein the adjusted operating margin expanded 130 basis points to 17%.

We believe that these upsides are likely to keep working in General Mills’ favor and help sustain the momentum.

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J&J Snack Foods JJSF, with a Zacks Rank #2, has an impressive earnings surprise record.

McCormick & Company MKC, with a Zacks Rank #2, has a long-term earnings per share growth rate of 8%.

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