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General Mills (GIS) Up 3.3% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for General Mills (GIS - Free Report) . Shares have added about 3.3% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is General Mills due for a pullback? 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 drivers.

General Mills Q4 Earnings Beat Estimates, Sales up Y/Y

General Mills released robust fourth-quarter fiscal 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Moreover, earnings and sales increased on a year-over-year basis. Given the current situation related to the coronavirus outbreak and its unpredictable impact on consumer demand globally, the company refrained from providing fiscal 2021 guidance.

Q4 Highlights

The company’s adjusted earnings per share of $1.10 increased 33% year over year on a constant-currency (cc) basis. Moreover, the bottom line beat the Zacks Consensus Estimate of $1.06 per share. The uptick can be attributed to improved adjusted operating profit as well as higher after-tax earnings from joint ventures. Reduced adjusted effective tax rate also contributed to the upside.

Net sales of $5,023 million increased 21% year over year and surpassed the Zacks Consensus Estimate of $4,978 million. Also, organic sales increased 16% on growth in North America Retail, Pet as well as Europe & Australia segment. Organic volumes as well as organic price/mix were favorable. The upside can be attributed to an extra week in the fourth quarter coupled with higher consumer demand amid the coronavirus pandemic. However, sales included an adverse impact of 2 points from unfavorable foreign currency rates.

Adjusted gross margin expanded 80 basis points (bps) to 36.1% owing to robust Holistic Margin Management (HMM) savings as well as favorable production leverage.  Adjusted operating profit came in at $888 million. The metric increased 24% at cc on the back of higher net sales. Adjusted operating margin expanded 40 bps to 17.7%.

Segmental Performance

North America Retail: Revenues in the segment came in at $3,196.4 million, up 36% year over year. Sales improved across all operating units owing to higher at-home consumption amid the pandemic.

Convenience Stores & Foodservice: Revenues dropped 24% to $393.1 million due to significant reduction in demand for away-from-home food amid the coronavirus outbreak.

Europe & Australia: The segment’s revenues rose 6% to $530 million, including adverse currency impacts of 4 points. Further, sales increased 4% year over year on an organic basis.  Softness in away-from-home channels was fully offset by growth in Betty Crocker dessert mixes and Old El Paso Mexican food. 

Asia & Latin America: Revenues declined 12% from the year-ago quarter’s figure to $348.9 million. The segment’s performance reflects the impact of coronavirus on Haagen-Dazs store and foodservice outlets traffic. Also, adverse currency rates were deterrents.

Pet Segment: Revenues came in at $554.6 million, up 37% year over year on the back of solid volume growth. Also, the segment results consist an additional month of results.

Other Financial Aspects

The company ended the quarter with cash and cash equivalents of $1,677.8 million, long-term debt of $10,929 million and total shareholders’ equity of $8,058.5 million.

General Mills generated $3,676.2 million as net cash from operating activities in fiscal 2020. During the same time frame, the company made capital investments worth $461 million, paid out dividends of $1.2 billion and lowered debt by $950 million.

Other Developments

Constant-currency sales from joint ventures of Cereal Partners Worldwide increased 13% in the quarter. In Haagen-Dazs Japan, sales declined 13% at cc from the prior-year quarter’s figure.

Outlook

The company anticipates net sales in fiscal 2021 to be favorably impacted by higher at-home demand for food compared with the pre-pandemic levels. Also, management remains optimistic about its robust execution skills. However, an additional month of results in the Pet segment along with higher demand due to COVID-19 in the fourth quarter could act as unfavorable comparison for fiscal 2020. Management also envisions reducing net-debt-to-adjusted-EBITDA ratio in fiscal 2021.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

Currently, General Mills has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. 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 upward for the stock, and the magnitude of these revisions looks promising. 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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