GIS slips as it lowers its outlook

General Mills (GIS) reported fiscal Q2 results that exceeded expectations on both earnings per share (EPS) and revenue. Adjusted EPS came in at $1.40, significantly above the consensus estimate of $1.22, and up from $1.25 in the prior year. Net sales rose 2% year-over-year to $5.24 billion, surpassing the $5.14 billion forecast. The earnings beat was driven by strength across key business segments and improved gross margins, even as inflation and promotional investments continued to impact results.

Key Segment Performance and Metrics

The North America Foodservice segment posted an 8.2% year-over-year increase in sales to $630 million, well above the $593.1 million expected, thanks to strong demand and inventory rebuilding. The Pet Segment saw a 4.7% rise to $595.8 million, also exceeding estimates. However, International sales fell short at $690.6 million, missing the $699.4 million estimate. Organic net sales grew 1%, outperforming the anticipated 1% decline, driven by a mix of pricing increases and targeted promotions. Gross margin improved to 36.3%, beating the consensus estimate of 35%, due to higher pricing and operational efficiencies.

Key Drivers of Results

Promotional investments and price adjustments were central to driving demand in several categories, including cereal and fruit snacks. Pet food sales benefited from rebuilt retailer inventory and price reductions in specific lines, highlighting the importance of competitive pricing strategies. However, elevated input costs—especially in labor, packaging, dairy, and sugar—offset some of these gains. The company’s strategy of increasing advertising and launching new products also contributed to the sales improvement, especially in North America.

Guidance Updates

General Mills lowered its fiscal 2025 adjusted EPS outlook to a decline of 1%-3%, compared with its previous range of -1% to +1%. Organic net sales growth is now expected at the lower end of its earlier guidance of flat to +1%, as the company increases promotional spending to address hesitant consumer demand. The revised guidance reflects cautious consumer sentiment amid inflationary pressures, alongside heightened competition from private-label brands.

Metrics to Watch

Key metrics for investors include the performance of the Pet Segment, particularly sales of the Blue Buffalo brand, which is expected to reaccelerate. Monitoring gross margin recovery and advertising spending—especially in the Pillsbury and cereal categories—will be crucial for assessing the company's ability to sustain growth. Organic sales growth and trends in international markets, where the company faces challenges, are also critical indicators to follow.

Price Action and Market Reaction

General Mills shares fell 2.8% in Wednesday trading, despite the earnings beat, as the lowered fiscal 2025 guidance weighed on investor sentiment. The stock is now down approximately 12% over the past three months, underperforming the broader S&P 500, which is up 27% year-to-date. The negative reaction underscores market concerns about the company's ability to navigate a challenging macroeconomic environment and maintain profitability amid rising costs and promotional investments.

Current Valuation

General Mills currently trades at approximately 14 times expected earnings, below the average multiple for its sector. Analysts have a consensus price target of $74, implying a potential 12% upside from current levels. Bank of America recently upgraded the stock to a "Buy," citing its attractive valuation and potential for organic sales growth to outpace competitors. The firm also noted that improved fundamentals in key categories, such as pet food and baking, could drive positive earnings revisions.

Conclusion

While General Mills delivered strong Q2 results, the lowered full-year guidance reflects the pressures of a cautious consumer environment and increased competition from private-label brands. The company’s efforts to balance promotional investments with margin improvement will be critical to long-term performance. Although the stock has underperformed recently, analysts remain optimistic about its valuation and growth potential, especially in the pet food and baking categories. The focus on operational efficiencies and targeted advertising may position General Mills to emerge stronger in fiscal 2026 and beyond.