General Mills (GIS) impressed with its fiscal fourth-quarter results announced on June 27. The company managed to sustain organic sales growth and reported improved margins, which is a positive, especially given the significant cost pressure from the inflation of raw material and logistics costs.
However, weak volumes across all business segments, rising interest costs related to the funding of the Blue Buffalo acquisition, and a soft earnings outlook for fiscal 2019 remained a drag.
General Mills management remains upbeat on the net sales growth rate for fiscal 2019 and expects 9%–10% growth led by the Blue Buffalo acquisition. Innovation-led new product launches should further support its sales growth rate.
Other packaged food companies, including Conagra Brands (CAG), Kellogg (K), J.M. Smucker (SJM), and Hershey (HSY), are also expected to benefit from the incremental sales of their recently acquired brands. However, it’s the low organic sales growth of these food manufacturers that fails to impress.
General Mills’ fiscal fourth quarter organic sales did improve, but the mere 1% growth failed to impress investors. General Mills expects its gross margin to stay flat or improve in the coming quarters, but its operating margin is likely to take a hit from higher costs and planned investments in growth initiatives.
However, what disappoints investors the most is General Mills’ sluggish outlook on the earnings front. The company’s fiscal 2019 adjusted EPS is projected to remain flat or decline 3%, reflecting a higher outstanding share count and increased interest expenses related to the financing of its Blue Buffalo acquisition. Analysts expect the company’s adjusted earnings to fall 1.6% in fiscal 2019.