General Mills (GIS): Is the Margin Gamble Worth the Risk?

General Mills (GIS) has long been a staple of the consumer goods sector, but its recent financials reveal a critical crossroads. The company's push to prioritize growth over margin stability—marked by aggressive investments in innovation, brand-building, and portfolio reshaping—has led to margin contraction across key metrics. With input costs rising and consumer demand softening, investors must ask: Is GIS's strategy sustainable, or is it a risky bet on uncertain returns?

The Margin Decline: A Calculated Risk or a Losing Hand?

General Mills' fiscal 2025 results underscore a stark trade-off. Fourth-quarter gross margin plummeted 340 basis points to 32.4% of net sales, driven by input cost inflation, unfavorable pricing, and the timing of trade expenses. Adjusted operating profit margin fell 330 basis points to 13.7%, with strategic investments in media and innovation absorbing significant costs. While these moves aim to boost volume and market share—particularly in high-growth categories like cereal and refrigerated dough—the short-term hit to profitability is undeniable.

The visual above highlights the erosion of GIS's gross margin, which has fallen from 35.8% in fiscal 2024 to 32.4% in fiscal 2025. This decline reflects both external pressures (e.g., tariffs, commodity prices) and internal choices, such as increased spending on advertising to combat competitive pressures.

Segment Performance: Winners and Losers in GIS's Portfolio

GIS's strategy hinges on balancing underperforming segments with high-potential areas:

1. North America Retail (NAR): The core business faces headwinds. Fiscal 2025 sales fell 5% as the yogurt divestiture to Lactalis weighed heavily. However, volume trends stabilized in key categories, with pound share gains in 64% of top U.S. categories. This suggests GIS's consumer value initiatives (e.g., price promotions, product innovation) are starting to resonate.

2. North America Pet: A bright spot, with sales up 4% in fiscal 2025, driven by the Whitebridge Pet Brands acquisition. Operating profit dipped slightly due to input costs and media spending, but the segment's 12% fourth-quarter sales growth highlights its potential as a growth engine.

3. International: Mixed results. While Brazil and distributor markets thrived, China's struggles and currency headwinds dragged down operating profit by 23%. GIS's ability to navigate regional challenges will be critical to margin recovery.

Strategy Evaluation: Can GIS Turn the Tide?

GIS's Accelerate strategy aims to realign its portfolio and operations for growth. Key pillars include:
- Holistic Margin Management (HMM): Aims to deliver 4–5% cost savings (as a % of COGS) to offset input inflation. The $100 million cost-savings target by fiscal 2026 could provide a critical buffer.
- Portfolio Reshaping: Divesting non-core assets (e.g., yogurt) to focus on higher-margin categories. The $2.1 billion yogurt sale to Lactalis, expected to close by June 2025, will free capital for reinvestment.
- Innovation and Brand-Building: Investments in “remarkability” (e.g., premium products, fresh pet food launches) aim to drive volume and pricing power.

GIS also faces a 53-week fiscal year in 2026, which will temporarily suppress sales growth by ~4%. However, the company's dividend remains a pillar of shareholder value: the 2% hike to $0.61 per share underscores its financial resilience despite margin pressures.

Valuation and Risks: Is GIS Worth the Wait?

GIS's stock currently trades at a P/E ratio of ~18x (based on trailing 12-month earnings), slightly above the food industry average of ~16x. This premium reflects investor optimism about its growth strategy, but risks loom large:

• Input Cost Volatility: GIS projects input inflation of 3% of COGS for fiscal 2026, but geopolitical risks (e.g., China trade dynamics, energy prices) could exacerbate costs.
• Consumer Sentiment: GIS's focus on price-sensitive categories (e.g., cereal) makes it vulnerable to prolonged cost-conscious spending.
• Margin Recovery Timeline: GIS's adjusted EPS is forecast to drop 10–15% in fiscal 2026, suggesting pain could linger longer than hoped.

This visual shows GIS's stock underperforming the broader market over the past two years, down ~15% versus the S&P 500's ~8% gain. Investors seeking stability may find this underperformance a red flag.

Final Verdict: Hold for Now, Buy on a Dip

GIS's margin gamble is a high-stakes game. While its long-term strategy—divesting underperformers, investing in high-margin segments, and leveraging cost savings—has merit, the execution risks are substantial. Near-term EPS declines and uncertain input costs suggest GIS's valuation is already pricing in some success.

Investment Stance:
- Hold GIS for now. The dividend provides a modest buffer, and the yogurt divestiture's proceeds (due in late 2025) could improve liquidity.
- Buy only on a significant dip (e.g., below $40/share, a 20% discount from current levels), as this would align the P/E with sector averages and reduce downside risk.
- Avoid if input costs escalate further or consumer demand weakens beyond expectations.

GIS's story is far from over, but investors must weigh patience against the likelihood of margin recovery. For now, the jury stays out—until catalysts like the yogurt sale close or HMM savings materialize, the risks remain tilted toward caution.