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General Mills: Gradually Improving Outlook Will Ensure Safe Long-Term Returns

General Mills is set to announce first quarter earnings on September 22, 2016.

At forward PE of 17.82x, the stock offers a dividend yield of 3.11%.

Using proceeds of Green Giant divestment to repay a portion of the debt would help reduction in total debt of approximately $9,224 million.

The lackluster sales and changing industry dynamics have hammered earnings to fall short of consensus expectations. Over the past five years, General Mills' (NYSE:GIS) per share earnings dropped by an average rate of 2.5%. The company missed the revenue estimates in three out of last four quarters. General Mills is set to announce first quarter earnings on September 22, 2016. The company is actively working on new strategies to make a comeback. And it will be interesting to observe the progress which to some extent may reflect in this earnings announcement. The stock has moved in the upward trajectory, outperforming the S&P 500 and USA/Consumer Staples over the last twelve months.

General Mills manufactures its products in 15 countries and markets in more than 100 countries. The company operates in three segments: U.S. Retail, International, and Convenience Stores and Foodservice. The U.S. retail segment, being the largest, generates around 60% of total sales revenue followed by 29% International, and 11% Convenience Stores and Foodservice segment. Now, General Mills is facing two major challenges. The mature packaged food industry of the U.S and adverse movement of the exchange rates, both are dragging revenues and earnings.

The global retail sales value of packaged food is $2.4 trillion. According to Allied Market Research's new report, the sales value of global packaged food market will reach $3.03 trillion by 2020, depicting a CAGR of 4%. Despite a modest global growth, the mature and very competitive packaged food industry of the U.S. offers limited growth potential. However, there are certain high growth opportunities such as yogurt, organic packaged food and gluten-free products that are well poised to grow at a faster pace.

In this regard, General Mills is pursuing four strategies to overcome the ailing sales problem which include boosting cereal sales, accelerating performance in yogurt and snacks, driving double-digit growth in the natural and organic portfolio and improving value on select brands.

The hunger for a healthy diet is stimulating demand for protein and vitamin rich yogurt and flavored yogurt, which would grow even at a faster pace. Yogurt became an import part of the portfolio when General Mills acquired a majority stake in Yoplait S.A.S. and Yoplait Marques S.A.S. in 2012. Despite an unsatisfactory performance in the preceding two years, the yogurt returned to profitability in 2015 with 16% contribution in total sales of the company. Now, General Mills is re-launching its Yoplait yogurt brand on September 21 in a bid to improve the revenue mix. Along with four seasonal all flavors, core brand renovation and marketing efforts will further enhance the revenue stream of yogurt business. Moreover, the 25% reduction in sugar content in Yoplait Original will be an added advantage to attract more customer, particularly health cautious.

The stout demand delivered 34% annual growth in value of gluten-free products to reach $973 million in 2014. Going forward, the changing consumer preferences will continue fueling demand by 19.2% annually through 2019 to reach $2.34 billion in 2019. This is another big opportunity General Mills is tapping. General Mills witnessed encouraging results as 30% of the U.S. consumer purchased gluten-free products during fourth quarter 2015. General Mills is equipped with five verities of gluten-free Cheerios and other offerings, more in the pipeline, to boost its gluten-free sales in the long-run.

The search for the healthy option has led organic food sales to more than triple over the past decade and increase 11% last year alone to $35.9 billion, according to the Organic Trade Association. To penetrate in organic food segment, General Mills acquired Annie's last year to strengthen its footings and this strategy is going well so far.

Under General Mills' umbrella, Annie's launched 54 new products, and its new organic yogurt will be available in January 2016. Utilizing General Mills' resources, the probability of Annie's growth is quite high, and the ultimate beneficiary will be able to make a comeback. In the 12 months through August 8, the distribution has improved by 11% and sales by 9.4% to approximately $235 million. Similarly, sales of Annie's boxed dinners, including its signature macaroni-and-cheese, rose 8% over the same period. Looking at these latest numbers, it is valid to expect that Annie's is becoming a key growth driver for General Mills in the near as well as long-term. Going forward, the flood of new products and a new yogurt offering will fuel the earnings in 2016.

In the meanwhile, General Mills is also trying to revive growth in its cereal portfolio to regain market share. The company is doing this by removing artificial colors and flavors from Yoplait, after which the brand witnessed double-digit growth. General Mills is also venturing deeper into Greek yogurt and has explored expanding its snacks portfolio. In addition to that, General Mills is improving the value of its center store products, which include dry dinners, dessert mixes, and soups, to win back the lost sales.

Besides domestic market, General Mills should also increase focus on international markets which account for 29% of the total revenue, particularly the emerging markets. It is expected that the packaged food market in Asia-Pacific will grow at a CAGR of 5.4% from 2015 to 2020, primarily driven by the growing per capita incomes and increasing health awareness. China and India would exhibit significant market growth for packaged food products. General Mills' presence in Asia Pacific is not quite strong, but now the company is increasing its offerings in China and other markets to enhance its international presence. According to Euromonitor, Chinese yogurt market stood at $10.25 billion last year and is expected to reach approximately $18 billion by 2019. With the launch of Yoplait yogurt and new vegetable-packed varieties of Wanchai Ferry dumplings in China, the revenue from international markets will experience a boost in the coming quarters. The three offering: thick and creamy French-style yogurt, a fruit-on-the-bottom variety and a drinkable yogurt containing fresh fruit, will add decent growth to General Mills' existing $725 million business in China.

There is no doubt that General Mills is aggressively addressing the challenges it has been facing due to changing industry dynamics. The company's initiative to offload Green Giant business and acquiring Annie's to win the organic food market will pay-off in the short as well as long-term. In addition to that, removing artificial flavors and gluten-free products will change the customer perception to a large extent. The high debt to equity ratio, one of the few major concerns still remains to shake the investors' confidence. Using proceeds of Green Giant divestment to repay a portion of the debt would help reduction in total debt of approximately $9,224 million.

General Mills expects earnings growth of mid-single digit in 2016 on flat sales. Over the next five years, the earnings are expected to witness roughly 6.56% growth. General Mills might not be an option for growth investor to consider, but the stock is quite attractive for safe dividend seekers. At forward PE of 17.82x, the stock offers a dividend yield of 3.11%. Moreover, the gradually improving outlook will ensure the safe long-term returns. However, the investors should wait for the earnings results to come out.