Should Walmart and Target Worry Over General Mills' Weak Quarter?

NEW YORK (TheStreet) -- Lackluster U.S. sales from major packaged-food companies could be a sign of unsavory things to come in November when earnings are disclosed from Walmart (WMT) , Target (TGT)  and other discount retailers. 

Walmart obtains 56% of its annual sales from its grocery business, which consists of the type of dry goods and ready-to-eat foods sold by General Mills (GIS) and Campbell's Soup (CPB) . Target gets about 20% of its sales from its "food and pet supplies" segment that sells goods ranging from boxed cereal to ice cream to puppy chow.

General Mills relies on Walmart for 21% of its U.S. retail segment sales. According to Bloomberg supplier data, Target relies on products from General Mills for 3.37% of its sales and 0.95% of its costs of goods sold. Campbell Soup's five largest customers accounted for 36% of the company's consolidated net sales in 2013, according to its annual report. Walmart was 19% of Campbell's net sales last year. Target gets roughly 3.13% of its sales from Campbell's Soup, and 0.34% of its cost of goods sold, according to Bloomberg.

General Mills, the maker of Cheerios and Wheaties, had a disappointing first fiscal quarter, suggesting tepid consumer spending on the grocery items essential to the sales and profits at Walmart and Target.

 Total sales came in at $4.27 billion, lower than the $4.38 billion Bloomberg consensus, with adjusted EPS totaling 61 cents, or 7 cents below expectations.

"Our results were driven by sales and profit declines in the U.S., where industry trends were weak in the quarter," said General Mills Chairman and CEO Ken Powell. The company reaffirmed its constant-currency growth targets for the fiscal year, but stated that "conditions in the U.S. market are more challenging than expected," which puts its targets at risk of not being achieved.

U.S. retail segment sales for General Mills fell 5% in the quarter because of "price realization and mix that subtracted 3% from sales," the company said. In other words, General Mills had limited pricing power and softer sales in pricier merchandise categories, which hints at continued pressure on same-store sales for Walmart and Target. Sales in the U.S. fell despite General Mills' unveiling a host of new products domestically.

As has become commonplace within the packaged-food industry, General Mills is undergoing a major restructuring plan to counteract its sales challenges. General Mills noted that its "Project Century" cost savings plan is expected to generate $100 million in annualized savings by fiscal 2017.

Campbell's Soup last week announced weak earnings. The soup maker disclosed quarterly sales that also missed consensus forecasts. Unlike General Mills, adjusted EPS was in line with Wall Street's estimates of 49 cents. But "volume and mix" declined 5% in Campbell's U.S. simple meals segment in the quarter, U.S. soup sales declined 3% and U.S. beverage segment sales fell 6%.

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Denise Morrison, Campbell Soup's president and CEO, summed up the challenges her company and others are facing on the earnings call by saying that the "industry is now in a period of profound change and challenge, and there has been a meaningful decline in the performance of the packaged food sector. Sources like the economic environment, the transformation of consumers' food preferences with regard to health and wellness and their demand for greater transparency, the powerful social and demographic changes and the rise of e-commerce are all driving significant changes in consumer behavior with respect to food."

Although the stock price performances of General Mills, Campbell's Soup, Walmart, and Target have differed this year, there has been a correlation heading into earnings season. Shares of all four companies lost ground in early April, and then again in mid-July prior to the onset of earnings season, as the market priced in uninspiring performance and outlooks. The concerns of the stock market went on to be confirmed by the actual financials weeks later.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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