General Mills Gains on Core Strategies, Cost Concerns Stay

General Mills, Inc. GIS has been benefiting from its robust growth strategies. In this regard, the company’s focus on three key priorities is noteworthy. Also, strength in the Pet segment and focus on innovations bodes well. Moreover, the company’s robust cost-saving efforts are helping it mitigate escalated costs.

Apart from these factors, the company is witnessing higher consumer demand, stemming from escalated at-home consumption and more cook-at-home amid the coronavirus pandemic. Incidentally, shares of General Mills have gained 25% in the past three months compared with the industry’s growth of 6.7%.

Factors Working in Favor of General Mills

General Mills is on track with its three key priorities for fiscal 2021. Firstly, the company expects to execute a ‘compete effectively, everywhere we play’ policy. Through this practice, General Mills aims to enhance brand penetration, strengthen its consumer partnerships and increase competitive service levels. Also, management expects to gain market share for some of its key categories via the strategy. Moreover, General Mills is on track with optimizing its efficiency to enhance investments. Management expects to reduce net-debt-to-adjusted-EBITDA ratio in fiscal 2021.

We note that General Mills is gaining significantly from the Pet segment, which includes Blue Buffalo Pet Products (acquired in fiscal 2018). Following the acquisition, the company became one of the leading players in the pet food arena. In fourth-quarter fiscal 2020, General Mills witnessed sales growth in the Pet segment. Revenues in the segment were up 37% year over year on the back of solid volume growth.

The company focuses on maintaining a steady product pipeline to boost sales momentum and capture market share. With evolving consumer food preferences, General Mills is investing in consumer-focused innovation and marketing as well as accelerating the natural and organic product portfolio to boost its sales. In this respect, the company expects to reap continued benefits from Annie’s, General Mills’ biggest natural and organic brand. Other noteworthy brands included in the category are Bunny Grahams, Muir Glen and EPIC. The natural products platform is likely to continue expanding in the forthcoming periods.

Apart from these, the company is currently pursuing many initiatives focused on improving operational efficiency to generate cost savings and support key growth strategies. It expects to achieve cost savings through increased efficiency, reduced complexity through SKU optimization, further supply-chain optimization and continued expansion of zero-based budgeting across the business that will boost margin expansion. Also, the company is on track with its Holistic Margin Management (“HMM”), which is expected to continue generating greater savings.

Hurdles on the Way

The coronavirus pandemic marred sales in General Mills’ Convenience Stores & Foodservice unit, which dropped 24% in the fiscal fourth quarter. Also, the company’s Asia & Latin America business has been witnessing challenges due to the coronavirus outbreak. Notably, revenues in the Asia & Latin America segment declined 12% in the quarter.

Apart from these, General Mills’ SG&A expenses increased 25% in the fiscal fourth quarter. Moreover, unfavorable foreign currency movements were a drag on General Mills’ top line by 2 points during the quarter. Clearly, volatility in exchange rates along with escalated costs is a threat to the company’s performance.

Although the company is focusing on the aforementioned upsides, it is yet to be seen whether these factors help this Zacks Rank #3 (Hold) company to counter these hurdles.

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