BP Stock- General Mills (GIS) Poised on High Demand, Accelerate Strategy
Like several other food companies, General Mills, Inc. GIS has been benefiting from high demand stemming from the pandemic-led elevated at-home consumption. Further, the company has been making solid progress on its priorities for fiscal 2021 outlined earlier. Apart from these, General Mills is focused on its Accelerate strategy. Strength in the Pet segment has also been adding gleam to the company’s performance.
These upsides drove the company in third-quarter fiscal 2021, wherein the top and bottom lines increased year over year and revenues beat the Zacks Consensus Estimate. Also, organic sales increased 7% on the back of broad-based market share gains. Encouragingly, management expects to continue witnessing elevated at-home food demand compared with pre-pandemic levels for the rest of fiscal 2021. This is likely to be backed by increased cooking and baking at home. The company is focused on capitalizing on these opportunities on the back of its strong brands, innovation and capacity to generate growth. Other food companies gaining on pandemic-led increased demand include The J.M. Smucker SJM, Kellogg K and TreeHouse Foods THS, to name a few.
Meanwhile, General Mills’ full-year organic sales are anticipated to rise nearly 3.5%, mainly due to solid year-to-date growth. However, it expects tough year-over-year sales comparisons in the fourth quarter of fiscal 2021. The tough comparison is expected on account of the initial surge in coronavirus-led at-home food demand as well as an extra month of Pet segment results. Moreover, the company’s Convenience Stores & Foodservice segment has been bearing the brunt of soft away-from-home demand due to the pandemic. Apart from these, escalated input costs pose threats to margins. Let’s delve deeper.
Factors Backing General Mills
General Mills is on track with its three core priorities for fiscal 2021, which include competing efficiently, operating with efficacy to fuel investments in brands and capabilities and reducing leverage. The company made solid progress on each of these priorities in the third quarter of fiscal 2021. With regard to the competing efficiently priority, the company’s brand strength helped it hold or increase market share in six out of its eight core markets in the first three quarters of fiscal 2021. Also, the company witnessed increased share in all its global platforms. As part of boosting efficiency, the company is on track with its Holistic Margin Management (HMM) and Strategic Revenue Management (SRM) initiatives. General Mills also progressed well with reducing its debt leverage in the third quarter of fiscal 2021, ending the quarter with a net debt to trailing 12-month adjusted EBITDA ratio of 2.8 times.
Moving on, the company’s Accelerate strategy is outlined to aid it in making choices of how to win and where to play, with an aim to boost profitability while enhancing shareholder returns in the long run. Under how to win, General Mills is focused on four pillars that are designed to provide a competitive advantage. The where to play principle is outlined to enhance the company’s capabilities to generate profitability through geographic as well as product prioritization, along with portfolio restructuring.
Notably, the company is benefiting from strength in its Pet unit, which includes Blue Buffalo Pet Products that was acquired in fiscal 2018. In third-quarter fiscal 2021, revenues in the segment were up 14% year over year on the back of solid volume growth. Certainly, the company’s investments in the Food, Drug and Mass channel expansion are working well for the segment. On its third-quarter fiscal 2021 earnings call, management stated that Blue Buffalo has emerged as a successful omnichannel business in the past three years, thanks to its brand strength and customer partnerships. Apart from these, the segment has been doing well amid the pandemic, as the rate of U.S. pet population growth has nearly doubled from the pre-pandemic level. Incidentally, General Mills’ long-term strategy of driving sustained growth in the Pet unit goes in tandem with its broader Accelerate strategy.
Not all is Rosy for General Mills
Sales in the Convenience Stores & Foodservice segment have been declining for a while now. During third-quarter fiscal 2021, revenues in the segment declined 10% to $417.1 million due to lower demand for away-from-home food amid the coronavirus outbreak. Reduced consumer traffic and other pandemic-induced restrictions have adversely impacted the segment’s major away-from-home channels like restaurants, lodging and schools. Moreover, the segment’s operating profit slumped 31% due to reduced net sales and deleverage of fixed expenses in the supply chain. We believe that the persistence of this trend will keep hurting the company’s performance in the future.
Additionally, General Mills is seeing elevated input costs, which affected its adjusted gross margin during the quarter under review. During the quarter, adjusted gross margin contracted 90 basis points to 33% due to elevated input costs, which include input cost inflation, escalated logistic costs and costs associated with securing additional capacity. Also, greater media and capability investments led to increased SG&A expenses. Management expects elevated input cost inflation and escalated logistic costs for the second half of fiscal 2021, which are likely to dent the company’s adjusted operating profit margin. This, in turn, is likely to negate strong year-to-date results and lead to in-line adjusted operating profit margin in fiscal 2021.
Nonetheless, we believe that the high pandemic-led demand and focus on strong growth strategies are likely to help this Zacks Rank #3 (Hold) company stay poised amid the hurdles. Shares of the company have gained 9.5% in the past three months compared with the industry’s growth of 6.5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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