Will Weak Volumes Dampen General Mills' (GIS) Q2 Earnings?

General Mills Inc. (NYSE:GIS) is set to report second-quarter fiscal 2018 results on Dec 20, before market open. Last quarter, the company delivered a negative earnings surprise of 7.79%.

This branded consumer foods’ company delivered a positive earnings surprise in two of the trailing four quarters, the average beat being 1.74%.

Factors to Consider

General Mills has been reporting dismal revenues for the last few quarters. Much like other U.S. food giants, General Mills too is having a tough time due to the shift in consumer preference toward natural and organic food.

Although General Mills is making significant efforts to drive revenue growth through consumer-focused innovations and marketing initiatives in its key businesses, the company is expected to witness muted sales growth in the second quarter of fiscal 2018. This is due to continued volume declines in North America.

Although the company expects organic sales to improve in the second quarter sequentially, we believe that the company needs time to register growth. The company expects product innovations, promotions during key seasons for soup and refrigerated dough, and investments in compelling media campaigns to strengthen its brands, will bring in improvements.

Sales and profits at the North America Retail segment, accounting for about 65% of the company’s total sales, have been soft due to lower demand amid weak food industry trends and changing consumer preferences.

Again, lower volumes and higher input costs are creating pressure on margins despite having profound cost-cutting initiatives to boost margin amid soft sales. General Mills’ adjusted gross margin contracted 230 basis points (bps), while its adjusted operating margin plunged 210 bps year over year in its last reported quarter. The downside was mainly due to continued decline in volumes, higher input costs on imported products, increase in advertising media expenses, and unfavorable mix that offset the benefits of its cost-saving plan.

For the to-be-reported quarter, the company expects the factors to turn favorable. Primarily, General Mills anticipates its volume to improve, banking on innovation in brand building. Hence, the rate decline of the company’s adjusted operating margin is expected to lessen in the second quarter (Read more: Will General Mills Witness Improved Margins in Q2?).

Overall, an expected decline in volumes, primarily in North America, higher promotional expenses, as planned for the second half of fiscal 2018, and rising input costs are likely to remain a drag on its bottom line in the to-be-reported quarter. Then again, General Mills’ focus on reducing its cost of goods sold through its margin-improvement plan along with lower share count is anticipated to give support for its EPS growth to some extent.

For the fiscal second quarter, the Zacks Consensus Estimate for earnings is pegged at 82 cents, reflecting a decline of 3.2% year over year. Meanwhile, the consensus estimate for revenues is pegged at $4.06 billion, implying a 1.2% decline.

Here is what our quantitative model predicts.

General Mills does not have the right combination of ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — which increase the odds of an earnings beat.

Zacks ESP: The Earnings ESP for General Mills is -1.93%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: General Mills carries a Zacks Rank #4 (Sell). Notably, we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

General Mills, Inc. Price and EPS Surprise

General Mills, Inc. Price and EPS Surprise | General Mills, Inc. Quote

Stocks to Consider

Here are a few companies in the Zacks Consumer Staples sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases.

Conagra Brands Inc. (NYSE:CAG) has an Earnings ESP of +0.65% and a Zacks Rank #2. The company is expected to report quarterly results on Dec 21.

Coty Inc. (NYSE:COTY) has an Earnings ESP of +3.30% and a Zacks Rank #3. The company is expected to report quarterly results on Feb 8. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Hershey Company (NYSE:HSY) has an Earnings ESP of +1.25% and a Zacks Rank #3. The company is expected to report quarterly results on Feb 2.

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