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Why General Mills Is Going to the Dogs in a Good Way

When most of us think of General Mills (NYSE: GIS), we think cereals -- from Cheerios to Lucky Charms, it's one of the two powerhouses that dominate that supermarket aisle. But sales of those breakfast staples have been shrinking for a while, and for a couple of years through last November, its share price was on a downward slope. But last year also featured its acquisition of pet food brand Blue Buffalo, and that has become a major driver of its growth.

In this segment from MarketFoolery, host Chris Hill and senior analyst Emily Flippen talk about General Mills' latest quarterly report, which featured an earnings beat despite a miss on revenue. They also consider how important pet food is for the company, the possible impact of its Gold Medal Flour recall, the cereal business, how its product portfolio might evolve, and the stock's strong performance so far in 2019.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Sept. 18, 2019.

Chris Hill: Speaking of General Mills, back when they bought Blue Buffalo, that showed up in this first quarter report from General Mills. It was a mixed quarter. The pet division's looking pretty good. The snack bar division, not so much.

Emily Flippen: Actually, pet food was the only division that saw any growth this quarter for General Mills. I think what investors were, I'm going to say excited about -- I think "excited" is probably an overstatement -- they enjoyed seeing that earnings still beat expectations. The fact that they reaffirmed organic net sales guidance for the year, 1% to 2%, although that 53rd week is definitely helping them out there to the tune of about 1%. So, even though they missed on revenue this quarter, I think the fact that there wasn't lower guidance was probably a good thing. That's why the market generally responded pretty positively.

But, as you mentioned, it's really just pet food. That acquisition of Blue Buffalo for them was the single thing that's keeping their business afloat right now. Pet food sales grew about 7%. While pet food, I don't think, is the first thing that comes to mind when you think about General Mills, I definitely think it's framing the way that they're considering their business. Ultimately, pet food sales is about 10% of their business, which is almost as big as their entire Europe and Australia business, and bigger than their Asia and Latin America business. So the fact is, pet food has become a big part of their business. Softening demand on the North American retail side for things like cereals and snacks, those are the things that are really dragging down this business. It'll be interesting to see what they're thinking about in terms of restructuring their product. Unfortunately, in General Mills is a big company with a long history, and they tend to be slow to innovate.

Hill: Here's another thing that's not helping General Mills: the news this week that Gold Medal flour, which is one of their brands that they have, General Mills issued a recall for 300 tons of flour for potential E. coli contamination.

Flippen: That sounds terrible! But when you say that, I'm sitting here thinking, I don't think I could tell you how many three tons of flour is. Is that a lot of flour for General Mills? Is that a small amount?

Hill: 300 tons.

Flippen: 300 tons. Well, it sounds like a lot. I will say that. Let's just hope this doesn't happen to Blue Buffalo.

Hill: Exactly. I'm not concerned about it, because when I bake, I use King Arthur. I have brand loyalty when it comes to flour and baking products. Here's another thing that surprised me, though. For the mixed quarter -- and you're absolutely right, pet food is not what the average person thinks of with General Mills; it's probably breakfast cereal -- this stock is up more than 40% year to date. This is not at all what I was expecting when I started looking into General Mills. It will be interesting to see, with all of the brands they have under their portfolio, and the success thus far of the Blue Buffalo acquisition, it'll be interesting to see what this company's brand portfolio looks like in, say, five years. It really wouldn't surprise me if they started looking to shed some of these snack brands, maybe not the breakfast cereal ones, just because I think they're so ingrained, and maybe that's a business that's essentially on autopilot. But it wouldn't surprise me if they started looking for more opportunities in the pet space.

Flippen: Yeah. And honestly, as somebody who has at least one bowl of cereal a day, I hope that they stay in the cereal game. They've kept it competitive. They kept options available to us cereal connoisseurs. But, I couldn't agree more that I would expect for them to really hammer down on the brands that are actually driving growth for the company.

Hill: What's your go-to cereal?

Flippen: Unfortunately, right now, it's a little bit basic -- Honey Nut Cheerios have made their rerounds to me. But traditionally, go back a month, it was always Special K.

Hill: Really?

Flippen: Oh, yeah! The flakes are so crunchy.

Hill: Yeah, and they've done a lot with flavors. That's one of those things where they've expanded to different flavors.

Flippen: I will admit, I did buy the pumpkin spice Special K.

Hill: How is it?

Flippen: Eh... I'm still eating the Honey Nut Cheerios.

Chris Hill has no position in any of the stocks mentioned. Emily Flippen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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