CHICAGO — Fitch Ratings on April 7 revised its outlook for Minneapolis-based General Mills, Inc. to “negative” from “stable,” reflecting what it sees as the potential risk for General Mills if the company is unable to stabilize revenue and grow EBITDA after two years of declining global sales growth in such categories as ready-to-eat cereal, yogurt and convenient meals.
“General Mills has one of the more diversified product portfolios in the industry, with strong brand equity and marketing expertise in large categories that span a variety of meals and snacks,” Fitch said. “The company is focused on five categories (cereal, ice cream, yogurt, convenient meals, and sweet and savory snacks) which comprise roughly 75% of its portfolio. There has been pressure on many of these categories over the past few years. Industry sales in the United States for the cereal category have declined steadily at a low- to mid-single-digit rate since peaking in 2011. Yogurt sales have also declined over the past year. The category, which had been one of the faster growing categories due to its healthy food perception, and the popularity of Greek yogurt, began to decline over the past year. New competition and lack of growth is taking a toll on the sector. These two categories are considered focus brands and make up approximately one-third of General Mills’ global sales.”
Fitch noted that General Mills has recorded sales declines in 13 of the past 14 quarters since the second quarter of fiscal 2014, and global sales for all the company’s product categories declined between fiscal 2015 and fiscal 2016.
“Some of this decline is attributable to secular changes in food preferences, some is a result of execution issues by General Mills, and some is a function of the effect that a strong U.S. dollar has on international operations as well as the fact that fiscal 2015 was a 53-week year,” the ratings agency said. “For example, the decline in U.S. cereal sales appears to be a function of changing customer preferences. General Mills’ U.S. cereal sales decline is in line with the industry, whereas the double-digit decline in General Mills’ yogurt sales over the past year is much greater than the low-single-digit industry sales decline. The yogurt decline can be attributed to innovation that did not work and price increases that were out of line with the industry.”
Fitch said it expects General Mills to continue shaping its portfolio by selling off slow- or negative-growth brands and acquiring businesses in faster-growing categories. Earlier this month 301 INC, the business development and venturing unit of General Mills, invested $3 million in Boulder, Colo.-based Purely Elizabeth, a maker of organic granola, R.-T.-E. cereal and oatmeal.
“In the near- to intermediate-term, Fitch expects organic growth to be challenged and trend negative in the low single-digit range beyond fiscal 2017 given the continued declines in the cereal and yogurt business,” Fitch said.
Looking ahead, Fitch said it may stabilize General Mills’ outlook if it is confident in the company’s ability to improve organic growth trends, while a “positive” ratings outlook may emerge if the company commits to maintaining leverage near two times with free-cash-flow margins maintained at 4.5% or above.
