General Mills Inc. GIS is set to report fourth-quarter and fiscal 2016 results on June 29, before the market opens. Last quarter, the company delivered a positive earnings surprise of 4.84%.
Despite soft sales figures, the branded consumer foods company delivered positive earnings surprises in three of the past four quarters with an average surprise of 6.24%.
Let’s see how things are shaping up for this announcement.
Factors to Consider
Sales and profits in General Mills’ U.S. Retail segment have been soft due to lower demand amid changing consumer food preferences. In fiscal 2016, increased competitive activity in Yogurt and reduced display and merchandizing levels hurt results in the segment. To cater to the evolving consumer tastes, the company is investing in consumer-focused innovation and marketing along with the accelerating distribution of its natural and organic brands in fiscal 2016.
Management’s renovation and innovation efforts with a higher level of advertising is expected to lead to better organic (excluding currency headwinds and the Green Giant divesture) sales trends in the U.S. Retail segment in the fourth quarter, largely in cereals and snacks. Organically, sales growth is expected to turn positive in the fourth quarter, rising in a low single-digit range.
General Mills divested its Green Giant and Le Sueur brands of frozen and shelf-stable vegetables to food manufacturer, B&G Foods, Inc. BGS, in November last year.
However, like the third quarter, net sales, segment operating profit and adjusted earnings are expected to decline in the fourth quarter due to the Green Giant divesture, currency headwinds and difficult year-over-year comparisons. The year-ago comparable quarter gained from an extra week.
Adjusted gross margins are expected to decline year over year in the fourth quarter, reflecting the highest quarterly input cost inflation rate. Media expenses are expected to rise in a double-digit range, excluding currency impact which will hurt operating profits.
Nonetheless, significant restructuring savings will provide bottom-line support like the previous quarters. General Mills is currently pursuing many multi-year restructuring initiatives to improve operational efficiency, generate cost savings and support key growth strategies.
Earnings Whispers
Our proven model does not conclusively show that General Mills is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is 0.0% as both the Most Accurate estimate as well as the Zacks Consensus Estimate stands at 60 cents.
Zacks Rank: General Mills’ Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Here are some food stocks that have both a positive Earnings ESP and a favorable Zacks Rank:
The Kraft Heinz Co. KHC, with an Earnings ESP of +2.86% and a Zacks Rank #3 (Hold).
Aramark ARMK, with an Earnings ESP of +10.71% and a Zacks Rank #3.
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