GIS Q2 Deep Dive: Investment in Value and Innovation Amid Volume and Margin Pressures

Yahoo

26-06-2025

Packaged foods company General Mills (NYSE:GIS) fell short of the market's revenue expectations in Q2 CY2025, with sales falling 3.3% year on year to $4.56 billion. Its non-GAAP profit of $0.74 per share was 4.1% above analysts' consensus estimates.
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Revenue: $4.56 billion vs analyst estimates of $4.58 billion (3.3% year-on-year decline, 0.5% miss)
Adjusted EPS: $0.74 vs analyst estimates of $0.71 (4.1% beat)
Adjusted EBITDA: $758.1 million vs analyst estimates of $749.6 million (16.6% margin, 1.1% beat)
Operating Margin: 11.1%, down from 16.5% in the same quarter last year
Organic Revenue fell 3% year on year (-6% in the same quarter last year)
Sales Volumes fell 2% year on year, in line with the same quarter last year
Market Capitalization: $27.49 billion
General Mills' second quarter results did not meet Wall Street's sales expectations, with revenue declining year over year—a trend that prompted a significant negative market reaction. Management attributed the underperformance to ongoing volume declines and competitive pressures in core categories, especially within North America Retail. CEO Jeffrey Harmening noted the company's increased focus on value investments in key brands such as Pillsbury and Totino's and expanded efforts in soup, cereal, and fruit snacks. Harmening acknowledged, 'We know that it's an investment year, but we are very confident these investments will pay off given what we've seen over the last couple of quarters.'
Looking ahead, General Mills' strategy centers on driving volume growth through increased marketing, new product launches, and targeted price adjustments, particularly in North America Retail and the pet food segment. Management expects these investments to pressure margins in the near term, but CFO Kofi Bruce explained that some impacts, such as stranded costs from divestitures and tariff-related expenses, are temporary. Harmening emphasized the importance of aligning pricing with competition to enable effective marketing, stating, 'It's about investment and making sure that we get trial on all of our good marketing initiatives.' The company is also betting on innovation, including a national launch of fresh pet food, to return the business to growth.
Management pointed to targeted value investments, stepped-up advertising, and product innovation as central to both recent performance and their plans to restore growth, while acknowledging persistent volume and margin challenges.
Value Investments Expanded: The company increased value-oriented promotions in categories like cereal, soup, and fruit snacks, aiming to improve volume trends. These investments were supported by enhanced advertising, particularly for brands such as Pillsbury and Totino's, which management believes can help regain share lost to competitors.
Fresh Pet Food Launch: General Mills announced a national rollout of Blue Buffalo's refrigerated pet food, building on positive test market results. Management expressed confidence in the brand's ability to scale profitably over time, but cautioned that initial investments to drive consumer trial will weigh on margins for several quarters.
Core Brand Renovations: The company undertook significant product updates and new product introductions, with Harmening describing the 'core renovation news' as the strongest in his tenure. Protein innovation and new seasonal offerings in snacks and cereals are intended to meet evolving consumer preferences.
International and Non-Retail Strength: While North America Retail remains challenged, General Mills reported share gains in international businesses, foodservice, and healthcare channels. These areas provided some offset to domestic headwinds, though management emphasized the need for further growth in its largest categories.
Margin Management and Productivity: Facing input cost pressures and increased reinvestment, management highlighted record levels of holistic margin management (cost-saving initiatives) and ongoing productivity efforts. However, they acknowledged that some margin reductions are temporary, linked to tariffs and stranded costs from divestitures, and expect improvement once these factors abate.
General Mills' outlook is shaped by continued investment in marketing, innovation, and selective pricing actions, with management expecting near-term margin pressure but aiming for volume recovery.
Stepped-Up Marketing and Innovation: Increased advertising spend and the rollout of new products, especially in protein-forward and seasonal segments, are expected to drive trial and brand engagement. Management believes these moves will support volume gains, even if dollar sales lag initially due to price reductions and trade investments.
Margin Headwinds and Recovery: The company anticipates that higher short-term expenses from marketing, tariffs, and stranded costs (such as those related to the Yoplait divestiture) will pressure margins. CFO Kofi Bruce described some of these as 'more temporary in nature,' with expectations for margin improvement as investments scale and cost-saving measures take hold.
Category and Competitive Dynamics: Management does not expect a significant rebound in category growth, instead focusing on competitiveness within core categories. Leadership cited the need to balance volume and pricing, leveraging strategic revenue management tools to navigate inflation, tariffs, and evolving consumer sentiment.
In the next few quarters, our team will be monitoring (1) the volume response to expanded value investments and new product launches, (2) the pace at which margin pressures from tariffs and one-time costs begin to abate, and (3) the national rollout and consumer adoption of Blue Buffalo's fresh pet food line. Execution in core North America Retail categories and the effectiveness of marketing investments will be critical to tracking the company's progress.
General Mills currently trades at $50.72, down from $53.37 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it's free).
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