by Clement Thibault
General Mills (NYSE:GIS), the U.S. based manufacturer of branded consumer staples, reports Q1 '17 earnings on Wednesday, September 21, before the market opens.
1. Earnings and Revenue Forecast
General Mills is expected to report earnings of $0.76 per share, along with revenues of $3.9 billion. If it meets these expectations, its EPS will have decline 3.8% year-over-year, with an even more substantial drop of 7% in revenue. It's also worth noting that General Mills' revenue has fallen during each of the past four quarters.
2. Big Stock Price Moves
The past three months have been surprisingly volatile for General Mills' share price. The company last reported earnings on June 29th, beating expectations by 10%. This propelled the stock upward, from $66 pre-report to an all-time high of $72.95 on July 6th. On September 7th, the stock began to fall when the company reaffirmed that they expected to see flat sales growth—at best—for fiscal 2017. Eventually the share price returned to its pre-report level, around $66, where it's been hovering ever since.
Of note about the stock price: while the last earnings report did beat lowly expectations, net sales were down 7% year-over-year, and the $0.63 EPS reported was a mild decline from previous years; it stood at $0.66 in 2014 (2015 has incomparable numbers). Additionally, the guidance reaffirmed on September 7th, the day of the decline, was already known months before the market reacted.
3. Sales by Category
It's clear that General Mills' sales are declining, but a deeper dive into its individual lines of business helps to better understand what GIS needs to do in order to right the ship. Seven corporate segments each contribute more than 10% to the company's total sales number. The biggest segment, 'Snacks'—which includes brands such as Nature Valley and Fiber One—brought in $3.3 billion in FY2016, and accounted for 20% of revenues. It has declined about 3% from FY2015.
'Meals'—including Annie's and Betty Crocker—follows with $2.7 billion, or 17% of total revenue. Sales fell just a few million dollars in this category, but for the second year in a row.
The company's other segments are 'Yogurt'—dominated by Yoplait; 'Cereals'—which includes blockbuster Cheerios; 'Baking Products'—which produces Pillsbury, Betty Crocker and Bisquick products; 'Frozen Foods'—Haagen Dazs is the dominant name here; and 'Small Planet (aka Organic) Foods'. One could list returns from each of the remaining segments in greater detail, but the point is simple: Every major segment in General Mills portfolio declined in 2016. Worse still, every segment except 'Snacks' declined for the second consecutive year in a row.
Right now customers are looking for what they perceive to be healthier choices on their supermarket shelves. For example, Greek yogurts in lieu of GIS's more sugary Yoplait, an area where rival Danone's (PA:DANO) Oikos brand has the upper hand. Indeed, General Mills is currently a minor competitor in the "healthy" market arena.
4. 2017 Fiscal Year Expectations
Tomorrow's report marks the first quarter of 2017 for General Mills' fiscal calendar. The company has already announced a few targets they wish to hit in the coming year. Primarily, it expects currency neutral EPS growth of 6%-8% with margin growth of 1.5% on its current 16% margins. The company generates a little over 70% of its revenue in the U.S., so it is less affected by foreign exchange than some of its multinational peers such as Nestle (SIX:NESN) and Danone. The bad news: the company's guidance for global net sales is for flat to -2% growth, meaning potentially a third straight year of declining sales overall.
Conclusion
All of this is not to say that General Mills is a bad company, or one that it's headed for major problems. The company is solid, with strong brand recognition from consumers for such marquee brands as Pillsbury, Cheerios, and Yoplait. Its sales should remain fairly consistent over the next twelve months, because customers tend to be creatures of habits, loyal to the brands they know...and even love.
GIS's bottom line is expected to improve due to divestitures such as the sale of Green Giant to B&G Foods (NYSE:BGS) in November 2015, as well as additional cost cutting moves including a 10%, $300 million decrease in SG&A over the past two years and a continuous decline in advertising expenses since 2012. But as always, cost cutting can only benefit a company's bottom line for a short while. Perpetually shrinking sales will inevitably start to take their toll.
On the upside, General Mills offers a nice dividend at $0.48 every quarter, which runs to $1.92 on the year, for a yield of almost 3%. And consumer staples companies are generally considered relatively safe havens during times of economic uncertainty given that consumers will always need their products. But even if you're interested in GIS only for the dividend, the company's P/E ratio of nearly 24—for a company whose steady bottom line growth stopped in 2011 and has been choppy since—should worry you. At least right now.
We believe General Mills will provide a better entry point in the coming year as the stock price settles. Wait until it reaches the mid-$50's before opening a position in the stock.