Today GIS presented at its Investor Day in NYC; there were, however, few updates today versus its commentary on the Q4 2013 earnings call on 6/26/13. We will be looking to the next quarters to evaluate returns from its yogurt and cereal businesses, in particular, and its margin management results in the face of COGS headwinds in a year in which the company expects to raise the dividend 15% and buyback 2% of shares outstanding. Our fundamentally bearish view of the company remains, as expressed in the note titled “GIS – Not Much To Like”, however our quantitative model signals a bullish formation in the stock across its immediate term TRADE and intermediate term TREND levels.
Here are the points of the business we are focused on:
- Gross margins remain under threat for cereal, yogurt, and convenience meals
- Cereal, its largest category, remains under pressure from demographic headwinds, particularly in America, despite increased advertisement spending; GIS is bullish on gradual improvement in the category following strong merchandizing from competitors in the beginning of year
- Yogurt has more room to show improvement, following the Yoplait acquisition; we like the innovation and marketing push behind its new Greek style yogurt and the runway in the U.S. given the lower share penetration versus other geographies (like Canada or France)
- Convenience meals remain off track and the company acknowledge the importance of returning to Helpers (core) versus its previous push towards a more artisanal offering
- Input cost pressures of 3% will remain a headwind in 2014, which the company hopes to overcome through cost savings initiatives via Holistic Margin Management (HMM); expect some pressure on promotions
- We like the expanding international footprint (34% outside of U.S. today vs 25% 5 years ago) and opportunity to increase cereal consumption in emerging markets. [Currently one half of GIS cereal volume is in the UK, Australia, Canada, and the U.S., which collectively only account for 6% of the world’s population]
- Company’s consumer outlook is one of improvement in which shopper seeks best value, which GIS can capture with its reach across retailers: Grocery (50%); Supercenter (30%); and Other Channels (20%) = Costco, Walgreens, Dollar General, and Whole Foods
Matthew Hedrick
Senior Analyst