General Mills

General Mills announced that Chief Operating Officer Dana McNabb will succeed Jeff Harmening as CEO effective Jan. 1. Harmening will transition to the role of executive chairman of the board of directors.

Why it matters: Like nearly all consumer staples companies, General Mills has struggled to generate organic volume growth. The firm has been focused on executing its Remarkable Experience Framework to reaccelerate organic growth, and we think the choice of McNabb will drive a smooth transition. McNabb became chief operating officer in June. She had been group president of North America Retail, the firm's largest segment, and North America Pet, a key growth area. We think she is a solid choice for CEO as General Mills' struggles are economy-based and not as much from execution. We remain optimistic about General Mills' efforts on innovation, price-package architecture, and marketing. But we continue to think it will take at least a couple of years for the firm to return to organic growth as consumer headwinds appear unrelenting in the near term.

The bottom line: We maintain our $43 fair value estimate, narrow Morningstar Economic Moat Rating, and Standard Morningstar Capital Allocation Rating for General Mills. We don't expect a dramatic change to strategy and, thus, our forecasts are unchanged. While we think shares are undervalued as we think a recovery is eventual, we're uncertain around the timing. Specifically, we think easing inflation pressure on US consumers will be necessary for General Mills' strategy to drive a return to organic growth. General Mills' shares were down by a low-single-digit percentage on the announcement. We don't think this is an indictment of the leadership choice but rather continued pressure on the entire packaged food sector as peers continue to report organic volume declines.

After updating our forecasts to incorporate fiscal 2027 first-quarter results, we have lowered our fair value estimate to $43 per share from $47. With pressure on consumers looking more likely to intensify before they ease, we expect a longer road to recovery than previously. We now expect organic sales growth returning to positive territory in fiscal 2029 (previously fiscal 2028). Additionally, we forecast adjusted operating margins to be depressed in fiscal 2027 and 2028, about 1 percentage point below our long-term forecast. Over the next five years, we reduced our average yearly organic growth rate forecast by about 80 basis points to 0.4%.

Our fair value estimate implies 14 times adjusted price/earnings and 12 times enterprise value/adjusted EBITDA on our fiscal 2027 estimates, which are on the higher end of the historical range given the challenging near-term outlook.

General Mills' fiscal 2027 first-quarter organic sales were flat, in line with the fourth quarter. Adjusted operating margin contracted 90 basis points sequentially to 14.4%. North American retail (56% of total) organic sales were down 3% on category pressure and changes in retailer inventory. The firm reaffirmed full-year guidance for organic growth of down 1.5% to up 0.5% and adjusted operating profit down 8% to 13%. At least, the situation hasn't worsened. We remain optimistic about General Mills' efforts on innovation, price-package architecture, and marketing. But we think it will take at least a couple of years for the firm to return to organic growth as consumer spending remains under pressure.

For fiscal 2027, we forecast organic sales to decline 1.2%, largely due to continued volume declines in its North American retail segment. Divestitures and the loss of fiscal 2026's 53rd week add another 400 basis points to the top-line decline for the year. We forecast fiscal 2028 organic growth to decline 30 basis points, reflecting an extended period of recovery. After 2028, we forecast organic revenue growth of roughly 1.2% per year.

For North American retail, we forecast five-year average annual organic revenue to be flat, weighed down by near-term pressure before recovering to about 1.3% per year. This is in line with the growth we anticipate from mature center-store packaged-food categories and with price/mix contributing a little more to growth than volume. We forecast higher organic growth for the pet food portfolio at 60 basis points per year, reflecting favorable pet ownership and humanization trends as well as the entry into the fresh pet food category. We expect more growth toward the latter part of our forecast, with the near term weighed down by economic headwinds and underperformance in parts of its dog food portfolio. For the North America foodservice segment, we forecast growth of 50 basis points per year, reflecting untapped market potential in schools and hotels. Beyond its home turf, we forecast revenue growth of nearly 2% per year, as new markets allow for relatively higher volume growth.

At midcycle, we forecast adjusted operating margins as defined by the company to reach 15.4%, below the historical range of roughly 16%-18%, as normalizing volume and price increases are offset by input cost inflation. Additionally, we think the company's renewed focus on its holistic margin management program should partially offset the added costs from increased product investments, as it has historically done a good job of maximizing supply chain and operational efficiencies without hurting the business.

We forecast 5.9% of sales for R&D and marketing. This is roughly in line with most other food producers and we believe should enable the company to maintain its standing with retailers and consumers.

Our forecast incorporates one ESG risk based on the social effect of the company's products. We see some risk around the healthfulness of the products, partly contributing to our low-single-digit organic sales growth outlook for the company.

We assign General Mills a narrow Morningstar Economic Moat Rating. For food producers, brand intangible assets and cost advantage are the typical sources of a durable competitive advantage. We think General Mills’ plethora of leading brands across several product categories makes it a valued partner for retailers. Although our forecast direct operating margin sits above the industry average, we do not attribute a cost advantage moat source as we believe this is reliant on its intangible asset.

Returns on invested capital, including goodwill, averaged in the low double digits before fiscal 2018, after which the acquisition of Blue Buffalo drove down returns to the high single digits. We forecast returns on invested capital to reach nearly 8% by the end of our five-year forecast period, exceeding our estimate of the firm’s cost of capital by 120 basis points.

Brand intangibles are most often observed through pricing power, dominant market share, and/or entrenched retailer/restaurant relationships.

Looking at cereal (17% of fiscal 2026 sales), based on our channel checks, General Mills' brands like Cheerios, Cinnamon Toast Crunch, and Lucky Charms sell for 20%-30% premiums to Ferrero’s brands like Frosted Flakes or Raisin Bran, Pepsi’s (through Quaker Oats) brands like Life, and Post’s brands like Pebbles and Honey Bunches of Oats. This further surfaces in a roughly 200-basis-point difference in midcycle gross margin between General Mills and comparable peers.

Not only does General Mills have the top brand in Cheerios, which held about 11% of the market in calendar year 2025, according to Euromonitor, but it holds several leading brands that together give the company a market-leading 32% share. Ferrero and Post follow at 27% and 19%, respectively, with no other competitor having more than 10%. Moreover, despite charging more, General Mills held steady share in the face of declining demand for cereal. Cereal has been losing favor on US breakfast tables, with market volumes having shrunk roughly 2 percentage points per year over the past decade through calendar year 2025, according to Euromonitor. Increased competition from frozen and fast food, shifting favor to protein away from carbohydrates, and falling dairy consumption have weakened its appeal. Over that same period, General Mills has held steady share, with others losing share to private label.

Despite the slow decline, cereal is still a $11 billion market, making it an important category for retailers. Moreover, new entrants have failed to take share, likely because of the need for constant product investment and/or consumer preference for a well-known taste when indulging in cereal.

General Mills’ brand leadership isn’t limited to cereal, further entrenching its importance on retailer shelves. Through a plethora of high-ranking brands in large and growing categories, General Mills holds meaningful share in fruit snacks (28% share), quick recipe kits (14%), cereal bars (24%), dessert mixes (18%), soup (14%), dry recipe sauces (16%), dog food (9%), dried ready meals (8%), and and cat food (4%). Together, these products constitute a roughly $78 billion market in calendar year 2025 set to grow nearly 5% per year, according to Euromonitor, making the company a valued partner for retailers.

We also think that General Mills will continue to spend enough on research and development and advertising to maintain its brand intangible asset. At roughly 6% of sales, spending is in line with peers. Directing some of that investment toward data and consumer analytics has helped the company bring products that resonate with consumers to market faster—down to 12 months or less in some instances from the 18 months-24 months it took to bring a product from concept to shelf previously. We expect this to continue, with General Mills staying on top of changing consumer preferences, keeping its products on trend, and maintaining mindshare.

We believe General Mills operates at lower costs than the industry average, as we forecast General Mills’ direct operating margin at 23% at midcycle, slightly above the industry median and ahead of no-moat food companies’ margins in or below the lower 20s. In packaged food, the wide variety of raw materials required to manufacture a diverse product mix makes economies of scale in manufacturing tough to unlock. More common are economies of scope, whereby efficiencies are generated in distribution rather than manufacturing. We believe that the company's strength across many product categories allows it to leverage distribution costs over more sales. However, we do not attribute a cost advantage to the company, as we think this ability would not exist if it were not for the scale and scope generated by its intangible asset.

We refrain from assigning General Mills a wide moat rating because of the uncertainty around its competitiveness and the food landscape beyond 10 years. Additionally, a lack of switching costs and the threat of new entrants constantly striving for proof of concept facilitated by the rise of e-commerce and social makes any competitive advantage beyond 10 years more difficult to achieve.

General Mills holds strong brands in pet food, which should benefit from growing pet ownership and humanization trends. The Blue Buffalo brand is particularly well positioned in the more attractive premium segment and should do well in the fresh pet category.

Hedging, price increases, and cost management help General Mills to absorb input cost inflation more effectively than some of its peers, as seen by its adjusted operating margin remaining healthy amid recent high inflation.

General Mills commands leading shares across several categories, entrenching its importance with retailers.

General Mills is particularly vulnerable to changing consumer preferences and health trends, given its reliance on cereal, snacks, and convenient foods (52% of fiscal 2025 sales). Losing market share could exacerbate the hit to its financial performance.

Holding premium brands could make General Mills exposed to consumers trading down or switching to private label amid difficult economic conditions.

General Mills could add to its meager organic growth outlook through acquisitions, adding the risk of overpaying or failing to integrate assets appropriately.