“Top-line growth remains muted, but it is showing some modest signs of a rebound now that the cereal category has stabilized and comparisons to last year’s merchandising losses are easing,” Robert Moskow, research analyst with Credit Suisse, wrote in a June 24 report.
|Robert Moskow, research analyst with Credit Suisse.
“We think the company enjoys greater-than-normal flexibility to reinvest in its business while dropping savings to the bottom line,” he said. “This dynamic should yield a ‘normal year’ of high single-digit eps (earnings-per-share) growth even though sales growth remains weak and the Green Giant divestiture poses an e.p.s. of headwind of perhaps 2%.”
Despite a number of headwinds and tailwinds to consider in the fourth quarter, Moskow said Credit Suisse believes the 60¢ implied by General Mills’ management’s guidance is “highly conservative.”
“If we are overly bullish, it might be because we underestimate the cost of higher advertising spending for cereal (there was a lot) and the failed attempt to revive U.S. yogurt with stronger merchandising,” he said.
Moskow said Jeff Harmening, who was named president and chief operating officer on June 23, has had a “rough ride” in his first two years as head of U.S. Retail but remains an “excellent leader” who has demonstrated an ability to keep the organization focused during a difficult time of restructuring and cost controls.
“We view him as the safe choice to maintain the company’s consistent approach toward reinvestment and growth,” Moskow said. “That said, perhaps his biggest challenge ahead will be to figure out whether to take even more aggressive steps to reduce the company’s cost structure (as peers like Kraft Heinz keep raising the bar on profit margins) or consider more aggressive acquisitions/divestitures to reposition the portfolio to adapt to a slower growth environment.”