General Mills stock (ticker: GIS) is making slight gains on a day when the market is down. The company recently presented at the Barclays Global Consumer Staples Conference, where it reaffirmed its full-year guidance. Despite this positive news, investors have shown little interest in packaged-food stocks.
Reaffirmed full-year guidance
In its presentation, General Mills stated that it expects adjusted earnings per share to increase by 4% to 6% year over year, resulting in a range of $4.47 to $4.56. This forecast aligns closely with Wall Street’s expectations of $4.50 per share. The company also anticipates a 3% to 4% rise in organic net sales.
Capital-allocation plans and supply-chain improvements
The company outlined its capital-allocation plans, placing emphasis on reinvesting in its business, dividend growth, mergers and acquisitions, and share repurchases. General Mills aims to reduce the average net shares outstanding by approximately 2% throughout the year. Furthermore, the company highlighted that supply-chain constraints have eased in recent months.
Stock buyback potential
Given the significant decrease in General Mills’ stock price this year—over 20% compared to the S&P 500’s 17% increase—the company may consider it an opportune time to repurchase its shares.
Decline amidst a challenging year for consumer staples
Consumer staples have been out of favor in the current market climate. Investors initially flocked to these safer stocks during the bear market of 2022. However, in the subsequent market rally of 2023 and with higher interest rates making bonds an attractive investment option, investors swiftly shifted away from consumer staples.
General Mills’ decline is particularly notable compared to its peers in the staples sector. The Consumer Staples Select Sector SPDR exchange-traded fund (XLP) has only experienced a 4% downturn year to date. In contrast, main rival Kellogg (K) has seen a decline of 16.5% in 2023.
Despite these challenges, General Mills remains optimistic about its position in the market and continues to adapt to changing conditions.
The Struggles of Packaged-Food Companies
It’s no surprise that investors have lost faith in packaged-food companies. While these companies experienced a surge in sales during the pandemic as people stocked up on their favorite brands to enjoy at home, they have seen a decline in demand as things have returned to normal. This downward trend has been further exacerbated by inflation, causing many consumers to opt for cheaper private-label products or explore alternative food options.
According to Evercore ISI analyst David Palmer, the outlook remains bleak for many major packaged food companies. Recent research conducted by his company reveals that sales for several meal-oriented food companies, including Kraft Heinz, General Mills, Conagra, Post Holdings, Hain Celestial, Kellogg, and B&G Foods, were down year-over-year in the last 4 weeks leading up to August 27th.
This trend was evident back in late June when General Mills reported lackluster sales for its fiscal fourth quarter.
General Mills is set to report its next quarterly results later this month; however, investor sentiment is expected to remain subdued.
J.P. Morgan analyst Ken Goldman expressed caution, stating, “Although we acknowledge the decline in valuations, it is difficult for us to be optimistic until we see signs of improvement in the underlying fundamentals and earnings estimates.” Goldman recently revised his estimates for various packaged-food companies, including General Mills.
Additionally, the increasing popularity of weight-loss drugs poses another challenge. It has become increasingly challenging for long-term investors to consider investments in companies that could suffer if food sales permanently decline.
While the future may seem uncertain for packaged-food companies, it is clear that a bottom needs to be reached in terms of both fundamentals and earnings before investor confidence can be restored.
