General Mills' Sales Growth Dependent On Innovation In Yogurt

CLSA analysts Michael Lavery and Will Gaertner think General Mills, Inc. (NYSE: GIS)'s sales upside is dependent on innovation in yogurt. The company's outlook is also weaker than expected by the Street analysts. As a result, the brokerage retained its Underperform rating and a price target of $65 on the shares of the company.

The two analysts believe that there was no respite in the continued pressure on General Mills' yogurt. That is primarily because it has not shown any improvement since the previous quarter as the company estimated. Incidentally, yogurt is critical for organic sales growth guidance for the fiscal year 2017, although it is modest. Therefore, the analysts believe the company will shift its focus to margins to accelerate them.

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"Strong innovation, not discounting, likely key to success in yogurt plans include renovations for traditional Yoplait and Greek Whips and new organic launches for Annie's and Liberte, all with greater price promotion (to drive trial) and displays, funded by lower advertising spending. We typically prefer brand spending to discounting, but the company's industry leading advertising spend has not achieved the desired results."

The brokerage does not believe that discounting would drive the share movement and thinks that only strong innovation would build equity. They cited the retail sales of cereal in the last 12 weeks, which was up 1.4 percent. CLSA believes that customers were responding to innovations like Nature Valley and Annie's cereal platform launches.

The analyst also pointed out "General Mills' cereal sales outpaced Kellogg's and the category's cereal sales, which fell -3.0 percent and -2.0 percent, respectively, in the 12 weeks ended June 12th. We expect these modest gains to continue to be offset by big yogurt declines."

At time of writing, General Mills was up 5 percent on the day, trading at $71.25.