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General Mills (GIS) Down 8.7% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for General Mills, Inc. (GIS - Free Report) . Shares have lost about 8.7% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted 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 Q4 Earnings Beat Estimates, Margins Grow

General Mills reported fourth-quarter fiscal 2017 adjusted earnings per share of 73 cents, surpassing the Zacks Consensus Estimate of 71 cents by 2.8%. Earnings also improved 11% year over year. On a constant currency basis, earnings grew 14%.

Adjusted earnings exclude restructuring, project-related expenses and mark-to-market valuation effects. Including these items, reported earnings came at 69 cents per share, up 11% year over year.
 
Sales Surpass

Total revenues of $3.81 billion surpassed the Zacks Consensus Estimate of $3.75 billion by 1.6% but declined 3% year over year owing to lower organic sales. Also, sales were weak in the core U.S. Retail and other segments barring Convenience Stores & Foodservice division.

Organically, excluding currency and acquisitions/divestures, sales were down 3%.

Price/mix improved 4%, whereas volumes declined 7%. Foreign exchange headwinds did not impact quarterly revenues.

Margins Improve

Adjusted gross margin increased 70 basis points (bps) to 35.1%, as input cost inflation and lower volumes were offset by savings from cost-reduction activities.

Adjusted operating margin increased 220 bps to 16.8%, owing to higher adjusted gross margins, benefits from cost-savings initiatives and a 17% decline in advertising and media expense.

Segment Performance

Beginning third quarter of fiscal 2017, the company has been reporting results under four new business groups: North America Retail, which combines U.S. retail segment and Canada region in international segment; Convenience Stores & Food Service; Europe & Australia, which is currently another international region; and Asia & Latin America, which combines the remaining two current international regions.

This structural change aims at maximizing global scale, unlocking global growth opportunities and driving efficiency.

North America Retail: Revenues from this segment declined 3% year over year to $2.39 billion due to double-digit declines in the U.S. yogurt operating units. This was partly offset by growth in the U.S. Snacks unit. Organic sales were down 4%. Volumes dipped 8%, while price/mix added 4% to revenues.

Segment operating profit was up 9% year over year, attributable to lower advertising and media expense and higher pricing.

Convenience Stores & Food Service: Revenues were flat year over year at $488 million. Growth at the Focus 6 platforms, comprising cereal, yogurt, and biscuits, offset the decline in other frozen dough products.

Organically, sales were flat, too. While volumes increased 2%, price/mix impacted revenues by 2% in the quarter.

Segment operating profit also remained unchanged from the year-ago level.

Europe & Australia: On a year-over-year basis, the segment’s revenues declined 14% to $487 million because of the reporting period difference in the year-ago period and unfavorable currency impact. Organically, sales were down 9%.

Foreign exchange headwinds dragged revenues by 5% in the quarter. Volumes were down 16% and price/mix had a 7% favorable impact on the quarter’s results.

Segment operating profit dropped 34% year over year. This was due to the reporting period difference and input cost inflation, including currency-driven inflation on products imported into the U.K. These were partially offset by benefits from cost-savings initiatives.

Asia & Latin America: Revenues were up 10% year over year to $440 million. Organically, sales grew 8%.

While volumes were up 2%, price/mix had a favorable impact of 6% on the quarter’s results.

Segment operating profit was down 17% year over year.

Fiscal 2017 Summary

The company’s earnings in fiscal 2017 came at $3.08, up 5% year over year and 6% on a constant-currency basis.

Total revenue declined 5.7% year over year to $15.6 billion in fiscal 2017. Adjusted gross margin advanced 50 bps to 36.1% and adjusted operating margin increased 130 bps to 18.1%.

Fiscal 2018 Guidance

Organically, year-over-year sales growth is expected to decline 1–2%.

Adjusted earnings per share (constant currency) are anticipated to grow 1–2% from the fiscal 2017 level of $3.08 per share. The company expects currency-related headwind of 1 cent on full-year fiscal 2018 adjusted earnings per share.

Total segment operating profit growth is estimated in the range of flat to 1%, on a constant-currency basis. Adjusted operating margin is expected to remain above the fiscal 2017 level of 18.1%.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been five revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 9.2% due to these changes.

General Mills, Inc. Price and Consensus

VGM Scores

At this time, General Mills' stock has a nice Growth Score of 'B', a grade with the same score on the momentum front. The stock was also allocated a grade of 'B' on the value side, putting it in the top 40% 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.

Zacks' style scores indicate that the company's stock is suitable for value, growth and momentum investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #4 (Sell). We expect below average returns from the stock in the next few months.




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