A month has gone by since the last earnings report for General Mills (GIS - Free Report) . Shares have added about 10% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.
General Mills Q2 Earnings Beat Estimates, Sales Up Y/Y
General Mills delivered second-quarter fiscal 2019 results, with earnings marking third straight beat. The top and the bottom line improved on a year-on-year basis. Further, management reiterated guidance for fiscal 2019.
The company’s adjusted earnings per share of 85 cents advanced nearly 3.6% year on year and beat the Zacks Consensus Estimate of 81 cents. On a constant-currency (cc) basis, earnings increased 2% year over year. The bottom line was fueled by an increase in adjusted operating profit and reduced effective tax rate, which was somewhat offset by escalated interest costs and higher shares outstanding.
Net sales of $4,411.2 million improved 5.1% year over year, backed by gains from Blue Buffalo. However, organic sales inched down 1% due to weakness in the North America Retail unit. The top line in the quarter fell short of the Zacks Consensus Estimate of $4,506 million. This marks the company’s fourth consecutive sales miss.
Adjusted gross margin increased 10 basis points (bps) to 34.5% owing to cost savings as well as gains from mix and price realization. These upsides were countered by higher input costs.
Further, adjusted operating profit of $765.2 depicted a rise of almost 7.6% from the year-ago quarter’s tally. This was mainly driven by improved sales and gross margin. Adjusted operating margin increased 40 bps to 17.3%.
North America Retail: Revenues in the segment came in at $2,677.1 million, down approximately 3.4% from the year-ago quarter’s figure. The downside was caused by lower merchandising activity in the U.S. Cereal unit and weak volumes in U.S. Snacks. Further, organic sales in the segment declined 3%.
Convenience Stores & Food Service: Revenues inched up 0.4% year over year to $514.4 million. Growth in the Focus 6 platforms including frozen meals and snacks had a positive effect on the segment’s results. These were countered by weakness in bakery flour. Organically, sales were flat compared with the prior-year quarter’s figure.
Europe & Australia: On a year-over-year basis, the segment’s revenues declined close to 2.8% to $453.8 million due to unfavorable currency impacts. Further, sales were flat on an organic basis. Increased sales of Fibre One and Nature Valley snack bars along with Haagen-Dazs ice cream and Old El Paso Mexican food aided the segment’s performance in the quarter. These were offset by dismal performance in yoghurt.
Asia & Latin America: Revenues declined almost 3.9% to $430.7 million due to unfavorable currency movements. Further, sales rose 5% on an organic basis. Pillsbury, Nature Valley snack bars, Häagen-Dazs ice cream and Wanchai Ferry frozen dumplings were some of the products that performed well in the segment.
Pet Segment: Revenues came in at $335.2 million. Sales in the segment declined 7% on a pro-forma basis, thanks to tough year-on-year comparison. Nevertheless, in-market performance was sturdy.
Other Financial Aspects
The company ended the quarter with cash and cash equivalents of $532.7 million, long-term debt of $12,208.6 million and total shareholders’ equity of $ 6,651.8 million.
General Mills generated $1,396.5 million as net cash from operating activities in the first half of the fiscal. During this period, the company made capital investments worth $254 million.
Further, General Mills paid dividends of roughly $589 million on a year-to-date basis.
Constant-currency sales from joint ventures of Cereal Partners Worldwide and Haagen-Dazs Japan inched up 2% and 1% in the second quarter, respectively.
Fiscal 2019 Guidance
Management is impressed with the in-market results from Blue Buffalo’s and continues to envision growth from this business. Further, the company is focused on its Consumer First strategy, cost reduction initiatives as well as focus on global growth to boost sales momentum.
All said, the company reiterated guidance for fiscal 2019 and expects organic sales growth in the range of flat to up 1%. Including Blue Buffalo’s buyout, net sales are anticipated to rise 9-10% on cc basis. Currency translations are expected to weigh upon net sales by approximately 1-2%.
Adjusted operating profit (on cc basis) is expected to jump 6-9% year over year. Finally, the company envisions adjusted earnings per share (on cc basis) growth in the range of 3% decline to flat compared with the fiscal 2018 figure of $3.11.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, General Mills has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions 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.