So far so good for the bevy of retailers and food companies presenting at the investment banks this week. Comments have been skewed more towards upbeat in regard to the U.S. economy, product innovation (excluding Gap (GPS) CEO's presentation) and the potential to cut more costs seven years post Great Recession.
But one presentation stood out like a sore thumb on Wednesday: that of food giant General Mills (GIS) . Shares fell as much at 4% on the session as the company "surprised" the Street by saying organic sales growth in the first quarter would be below the full-year guidance rate. In addition, the company forecast earnings to be down amid pressured core sales and a tough year-ago comparison. I put "surprise" in quotations because what General Mills had to say about its top line shouldn't have come as a big wow moment to investors for several reasons.
For starters, the company has had trouble re-gaining traction in the competitive yogurt business. Companies such as Chobani have slashed prices due to the decline in milk prices and there has been a ton of new entrants into the space hawking Greek yogurt and other varieties. General Mills' innovation -- from packaging to flavors -- hasn't kept pace (although their Yoplait Whips launched last year are very good). The company will be overhauling 60% of the portfolio over the next 12 months, making packaging look cooler (hey, it's important to have great packaging in consumer goods space) and enhancing what it offers from new flavors to a focus on organic. Getting consumers to notice the changes will take time, something the company reaffirmed on Wednesday.
Secondarily, General Mills' presentation comes a few days after Campbell's Soup (CPB) laid an egg with its most recent quarter and conference call. While Campbell's troubles in the quarter could be linked to multiple execution missteps, the reality is that selling commodity items not tied to the snacking trend such as soup and cereal remains a tough business. What has happened is that the market has viewed big food as well down a path of reinvention, acquiring businesses in the organic space and upgrading ingredient profiles on older products as surefire ways to drive strong sales and profit. Unfortunately, newer business and product lines will take time to be the huge top and bottom line drivers that legacy businesses continue to be. Change doesn't happen overnight.
So it's very likely shares of General Mills -- which have been red-hot -- trade with a downward bias headed into the company's earnings release on Sept. 21. The market's concern: a slashing of full-year earnings guidance in light of what looks to be a challenging start to the year. But if one has been in on General Mills' meteoric run, it's important not to lose sight of why you bought the stock: not because of a rip-roaring top line, but because of strong management that is driving needed product changes and serious cost cuts. Those fundamental aspects haven't changed, which makes General Mills shares trading in the mid-to-low $60s an intriguing long-term opportunity.
Keep in mind what General Mills didn't lower on Wednesday...
- General Mills still sees annual costs savings of $600 million by fiscal 2018 -- it raised this mark a few months ago from $500 million. Huge number here that will counteract any sales pressure. There is likely room to cut deeper, by selling assets, should it become necessary.
- In large part due to its cost cutting, General Mills sees earnings per share rising 6% to 8% in its current fiscal year (2017). For fiscal year 2018, the company expects earnings growth to accelerate to a low double-digit percentage. Having followed General Mills for a while, it doesn't tend to put out unrealistic targets and will fight tooth and nail to make its numbers.
