Analyst Anticipates Risks To General Mills' Topline Growth Amid Retailer Inventory De-Stocking

Morgan Stanley analyst Pamela Kaufman reiterated an Underweight rating on the shares of General Mills, Inc. GIS, lowering the price target to $72 from $77, following mixed 4Q23 results.

The analyst remains cautious about the company's long-term growth outlook, given its relatively weaker end markets and potential for demand elasticity from recent price increases. Kaufman also flags risks to margins from elevated input cost inflation. 

General Mills reported fourth-quarter FY23 sales growth of 3% year-on-year to $5.03 billion, missing the analyst consensus of $5.17 billion. General Mills sees FY24 Organic net sales growth of 3% - 4%.

The analyst notes that the company's topline miss underscores that even Mills is not immune to the increasingly complex operating environment. 

The company's topline shortfall reflects a heightened degree of retailer inventory destocking during the quarter (500 bps drag to NA Retail sales) as retailers manage their working-capital levels, with Mills pointing to "record low" retail inventory levels.

The analyst reduced the target multiple due to the group's ~7% multiple contractions over the last month and greater uncertainty around the forward outlook.

Going ahead, the analyst projects risk to topline guidance given tepid volume growth in GIS's NA Retail categories volumes (1.6% CAGR in 2019-2022).

Kaufman also forecasts the risk of rising promotions as Mills is losing share in its categories, coupled with lower expectations from the Pet segment as consumers cut back on treats/wet dog food. 

GIS's shares remain expensive relative to the group, with a 23% premium to peers, mentions the analyst.

The analyst expects FY24 EPS to be $4.46 (vs. $4.35 prior estimate) and FY25 EPS of $4.61 (vs. $4.54 previous estimate) to reflect slightly higher gross margins and a lower tax rate.

Price Action: GIS shares are trading lower by 0.42% to $76.40 on the last check Thursday.