Why Is General Mills (GIS) Down 8.1% Since Last Earnings Report?
It has been about a month since the last earnings report for General Mills (GIS). Shares have lost about 8.1% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.
General Mills Ups Guidance on Q2 Earnings & Sales Beat
General Mills posted solid second-quarter fiscal 2023 adjusted earnings of $1.10 per share, which beat the Zacks Consensus Estimate of $1.06 and our estimate of $1.04. The bottom line rose 12% year over year on a constant-currency (cc) basis. The upside can be mainly attributed to the elevated adjusted operating profit, the reduced adjusted effective tax rate and decreased net shares outstanding, somewhat negated by the reduced benefit plan non-service income.
The company reported net sales of $5,220.7 million, which beat the Zacks Consensus Estimate of $5,150 million and our estimate of $5,106.7 million. The top line advanced 4% from the year-ago quarter’s figure. The metric included a five-point unfavorable impact of net divestitures and acquisition activity and a one-point adverse impact of currency movements.
Organic net sales rose 11% due to the favorable organic net price realization and mix. These were somewhat offset by the reduced organic pound volume.
The adjusted gross margin expanded 100 basis points (bps) to 33.2% due to the positive net price realization and mix, along with gains from Holistic Margin Management (“HMM”) cost savings. These were somewhat offset by input cost inflation, supply-chain deleverage and the increased other costs of goods sold. The cc adjusted operating profit rose 7%, backed by increased adjusted gross profit dollars, somewhat offset by higher adjusted SG&A expenses. The adjusted operating profit margin expanded 60 bps to 16.9%.
North America Retail: Revenues in the segment came in at $3,373.1 million, up 11% year over year. The uptick can be attributed to the positive net price realization and mix, which somewhat offset the reduced pound volume, and the helper and Suddenly Salad divestiture. Organic net sales grew 13% year over year. The segment’s operating profit increased 24% to $837 million.
International: Revenues in the segment came in at $671.7 million, down 27% year over year. The downside can be attributed to the reduced pound volume, which includes the impact of yogurt and dough divestitures, as well as the ice cream recall. Also, the adverse impact of unfavorable currency rates is a headwind. That said, the favorable net price realization and mix offered some respite. Organic net sales grew 5% year over year due to advancements in Brazil, distributor markets, and Europe and Australia, partly negated by softness in China. The segment’s operating profit slumped from $59 million to $18 million.
Pet: Revenues came in at $592.9 million, flat year over year, as the positive net price realization and mix were countered by the reduced pound volume. Organic sales also remained flat year over year. Management expects the Pet sales performance to speed up in the second half of fiscal 2023, led by higher capacity, better customer service, elevated brand-building investment and anticipation of stable retailer inventory levels. The segment’s operating profit came in at $87 million compared with the $132 million reported in the year-ago period.
North America Foodservice: Revenues came in at $583 million, up 24% year over year, reflecting the positive net price realization and mix, including a benefit of five points from market index pricing on bakery flour. Net sales also included a six-point gain from the TNT Crust buyout. Organic sales rose 17%. The segment’s operating profit jumped 20% to $82 million.
Guidance
General Mills expects that the biggest factors impacting its show in fiscal 2023 are likely to be consumers’ economic status, cost inflation and supply-chain bottlenecks. The company anticipates volume elasticities to remain lower than historical levels in the second half of the fiscal. Compared with its previous fiscal 2023 guidance, management now anticipates greater organic net sales growth due to improved volume performance and a better price/mix.
For fiscal 2023, management expects input cost inflation of 14-15% percent of the total cost of goods sold. Management continues to expect HMM cost savings of 3-4% of the cost of goods sold. It also expects moderately reduced supply-chain hurdles and greater investments in brand building and other growth-driving initiatives compared with the year-ago period.
For fiscal 2023, organic net sales are anticipated to increase 8-9%. Earlier, management expected organic net sales growth of 6-7%. The net impact of divestitures, acquisitions and foreign currency movements is likely to lower full-year reported net sales growth by about 4.5%. The adjusted operating profit growth at cc is now anticipated at 3-5%. Earlier, the metric was anticipated between flat and an increase of 3%. Both views include a three-point net adverse impact of divestitures and buyouts and a one-point headwind of the ice cream recall.
Adjusted EPS growth at cc is now envisioned between 4% and 6%. Previously, adjusted EPS growth at cc was expected to rise 2-5%. The raised guidance reflects greater adjusted operating profit growth and increased net interest expenses. The guidance includes a three-point net adverse impact of divestitures and buyouts and a one-point headwind of the ice cream recall. Currency woes are still likely to have a nearly 1% adverse impact on the adjusted operating profit and the adjusted EPS.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
VGM Scores
At this time, General Mills has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, General Mills has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
General Mills is part of the Zacks Food - Miscellaneous industry. Over the past month, United Natural Foods (UNFI), a stock from the same industry, has gained 0.2%. The company reported its results for the quarter ended October 2022 more than a month ago.
United Natural reported revenues of $7.53 billion in the last reported quarter, representing a year-over-year change of +7.7%. EPS of $1.13 for the same period compares with $0.97 a year ago.
For the current quarter, United Natural is expected to post earnings of $1.38 per share, indicating a change of +22.1% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for United Natural. Also, the stock has a VGM Score of B.
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