Market Overreacting to General Mills' Results

The challenges plaguing the packaged-food landscape have been well documented, stemming from an outsize focus on driving efficiencies that have failed to ignite sales; intense competition from other branded players, small niche operators, and lower-priced private-label offerings; heightened inflation; and a consolidating retailer base that is struggling to bolster traffic.

In light of these pressures, narrow-moat

While we don’t expect recent headwinds to abate in the near term, we view the firm’s strategic initiatives to extract excess costs as a means of funding more impactful innovation and marketing as prudent. More specifically, General Mills targets generating $700 million in costs savings (around 6% of fiscal 2017 cost of goods sold and operating expenses, similar to peers), which we expect will be funneled to research and development (amounting to 1.6% of sales over our 10-year forecast) and marketing (at more than 5% of sales annually). In this context, we forecast the pressure on the top line will persist in fiscal 2017 (to the tune of a nearly 2% decline), but anticipate the combination of innovation and expanded penetration of its fare into its core international markets (around one fourth of sales) will lead to 2%-3% total sales growth in the longer term (driven by slightly more benefit from increased volumes and the remainder from higher prices and favorable mix).

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