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A Shift Towards At-Home Eating Lifts General Mills' Outlook

By Demitri Kalogeropoulos - Mar 18, 2020 at 10:32AM

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The snack and cereal giant is seeing elevated demand and only a minimal COVID-19 related disruption to its supply chain.

The business impact of the novel coronavirus outbreak isn't completely negative. On Wednesday, General Mills (GIS 0.98%) announced earnings results that, while showing pressure on parts of its global consumer food business, included steady sales growth. The owner of popular snack and cereal brands such as Cheerios and Nature Valley also issued an optimistic outlook that predicts continued sales and profit gains as consumers shift their budget spending toward eat-at-home products such as cereal, yogurt, and snack bars.

Let's dive right in and see what else the earnings report had to say about this consumer staple stock. 

A child enjoys a bowl of cereal at the kitchen table.

Image source: Getty Images.

A solid quarter for General Mills

Sales trends landed about where management expected they would, with global organic sales holding flat. General Mills saw strong growth in its pet food segment that was mostly offset by weaker demand in its core U.S. retailing business. The company also noted a sales drag tied to the COVID-19 outbreak in China, which reduced customer traffic at its snack shops in that country.

Still, the company met its short-term targets through late February. "Our third-quarter results were broadly in line with our expectations," CEO Jeff Harmening said in a press release, "except for the negative impact in Asia of the COVID-19 virus outbreak."

The profitability news was mixed, as gross profit margin held steady but operating income margin fell to 16.1% of sales from 17.4% after adjusting for currency exchange rate shifts. General Mills blamed a sudden drop in ice cream sales in China, related to virus-depressed customer traffic levels, for all of that decline.

Looking ahead

The virus outbreak containment measures didn't start in the U.S. until after the quarter ended, but General Mills has seen enough demand data in recent weeks to make a few predictions about its short-term sales trends. Consumers are spending more on at-home food as health organizations recommend more social distancing, and that shift is leading to spikes in sales volumes, just as many investors had hoped. "I'm proud of the way we've partnered with our retail customers in recent weeks to service consumers' increased demand for food at home during this unique time," Harmening told investors.

While describing the unfolding situation as highly dynamic, General Mills said it is seeing elevated order volumes from its grocery store and retailing partners. The consumer staples giant has noticed only minimal disruption to its supply chain to date. As a result, its fiscal 2020 outlook is brightening.

That forecast still calls for global organic sales to rise by between 1% and 2% despite the recent demand slump in China. Earnings are on pace to rise by more than what management had predicted a few months ago, mainly thanks to favorable cost trends. General Mills sees adjusted earnings rising by between 6% and 8% in fiscal 2020.

Social distancing efforts aimed at slowing the outbreak have caused major changes to shopper behavior in recent days, but General Mills believes it can meet the manufacturing and distribution challenges those shifts have generated, at least over the short term. "We'll remain agile to adapt to changing demand patterns around the world as circumstances with COVID-19 continue to develop," executives said.

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