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Earnings preview: Cost pressure to dampen General Mills’ Q4 prospects

Food company General Mills, Inc (NYSE: GIS), the maker popular brands like Cheerios and Natural Valley, is scheduled to publish fourth-quarter results Wednesday before the opening bell. Market watchers predict a 4% decline in earnings to $0.76 per share, while revenues are expected to grow 9.2% to $4.25 billion. The not-so-impressive year-over-year comparison is mainly due to last year’s relatively strong fourth quarter.

Cost escalation continues to be a concern as far as margins are concerned and the trend is expected to continue throughout this year, with the main contributors being the high costs of packaging, shipment, and raw materials. The measures being adopted by the management to reduce costs, like improved budgeting and optimization of the supply chain, are likely to ease the impact of cost inflation to some extent.

General Mills Q4 sales up 8%

Like in the past, the top line will benefit from synergies from last year’s acquisition of pet food company Blue Buffalo, with the integration progressing rapidly. Adding to the growth prospects, the Blue Buffalo brand has grown significantly since the buyout.

The management’s efforts to bring innovation into operations have started yielding results. The revamped marketing strategy, initiatives to give customers improved store experience and expansion of the online platform would help General Mills stay relevant in the fast-changing food industry. Going forward, the company is likely to pursue buyouts to drive growth, while also streamlining the portfolio through divestitures.

Also see: General Mills Q2 2019 Earnings Conference Call Transcript

In the third quarter, stable sales in North America, the company’s biggest market, pushed up total sales by 8% to $4.2 billion. Consequently, adjusted earnings rose 6% to $0.83 per share. A decline in volume was more than offset by favorable pricing and product mix.

Among the other food companies, Kraft Heinz (KHC) has delayed the release of its first-quarter results pursuant to an investigation into its procurement practices. Based on an SEC notification, the company recently restated the financial reports for a period of more than two years to rectify certain errors.

General Mills shares have maintained an upward trajectory since December last year – when it plunged to the lowest level in six years – gaining about 45% during that period. Since last year, they grew 20%.

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