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Why Is General Mills (GIS) Down 2.6% Since Last Earnings Report?

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A month has gone by since the last earnings report for General Mills (GIS - Free Report) . Shares have lost about 2.6% 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 drivers.

General Mills Beats on Q1 Earnings, Sales Down Y/Y

General Mills released first-quarter fiscal 2020 results. The company’s adjusted earnings per share of 79 cents increased 13% year over year on a constant-currency (cc) basis. The bottom line beat the Zacks Consensus Estimate of 77 cents.

The upside was fueled by reduced adjusted effective tax rate and net interest expenses as well as higher adjusted operating profit and non-service benefit plan income. These were somewhat offset by higher average shares outstanding.

Net sales of $4,002.5 million declined 2.2% year over year and missed the Zacks Consensus Estimate of $4,092 million. Except the Pet unit, sales in other segments were dismal.

Organic sales inched down 1% due to lower organic volume. This was somewhat compensated by positive organic net price realization and mix across most segments

Adjusted gross profit amounted to $1,410.6 million, up nearly 2.5%. Adjusted gross margin expanded 160 basis points (bps) to 35.2%. Markedly, adjusted gross margin in the prior-year quarter included a one-time purchase accounting inventory adjustment associated with the Blue Buffalo acquisition.

Adjusted operating profit came in at $682.1 million. The metric improved 7% at cc, courtesy of gains from the purchase accounting impact in the prior-year quarter. Adjusted operating margin improved 130 bps to 17%.

Segmental Performance

North America Retail: Revenues in the segment came in at $2,376 million, down 0.5% year over year. Gains from net price realization were countered by lower volume contributions. Sales in categories such as U.S. Snacks, U.S. Meals & Baking unit and Canada were dismal. Further, organic net sales were flat compared with the year-ago quarter’s level.

Convenience Stores & Foodservice: Revenues declined 4% year over year to $445 million, due to sluggishness in bakery flour volumes and adverse impacts of index pricing. These were partially offset by growth in the Focus 6 platforms. Organically, sales decreased 4% from the year-ago quarter’s levels.

Europe & Australia: The segment’s revenues declined 9% to $454 million due to reduced volumes and unfavorable currency rates, partially countered by gains from net price realization and mix. Further, sales declined 5% year over year on an organic basis. The downside in sales was caused by tough operating environment in France, weak trends in ice cream and issues in merchandising phasing.

Asia & Latin America: Revenues declined almost 10% from the year-ago quarter’s levels to $360 million. The downtick was caused by adverse impacts of divestitures in fiscal 2019, reduced volumes and unfavorable currency movements. These were partially compensated by gains from net price realization and mix. Further, sales declined 3% on an organic basis due to lower inventory levels in Brazil, distribution network alterations in India and reduced volumes in China.

Pet Segment: Revenues came in at $368 million, up 7% year over year on the back of volume growth as well as favorable net price realization and mix impacts.

Other Financial Aspects

The company ended the quarter with cash and cash equivalents of $504.8 million, long-term debt of $11,619.8 million and total shareholder equity of $7,382.8 million.

General Mills generated $572.1 million as net cash from operating activities in the first quarter. During the quarter, the company made capital investments worth $70 million and paid dividends of nearly $298 million.

Fiscal 2020 Guidance

General Mills reiterated its guidance for fiscal 2020. Management expects organic sales to improve 1-2%. Moreover, net sales are expected to rise 1 percentage point on the back of gains from divestitures, favorable currency translations and contributions from the 53rd week in the fiscal.

Adjusted operating profit (on cc basis) is expected to improve 2-4% from $2.86 billion delivered in fiscal 2019. Also, the company envisions adjusted earnings per share (EPS) growth (at cc) in the range of 3-5% year on year. Currency translation impacts are expected to remain irrelevant on adjusted operating profit and the bottom line.

Additionally, the company estimates free cash flow conversion of minimum 95% of adjusted after-tax earnings.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, General Mills has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision 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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