Blue Buffalo sales leap under General Mills, but analyst warns rapid growth may have peaked

Blue Buffalo pet-food sales shot up 38% this spring as General Mills placed the brand in the nation's biggest retailer, executives said Wednesday.

But General Mills shares fell 5.6% Wednesday as investors focused on an analyst's warning that the pet brand's growth was already being reflected in its stock price, which has been near a two-year peak recently.

The Golden Valley food giant just completed its first year with Blue Buffalo under its wing and investors had been looking to the brand's spring performance, when its products reached the shelves of Walmart, for a real indication of whether the acquisition would pay off for General Mills.

For the year, Blue Buffalo's sales rose 11% and its operating profit, excluding charges related to the deal that brought them together, also rose 11% on a pro forma basis.

"We promised double-digit growth and we are pleased to say we delivered that," General Mills CEO Jeff Harmening said at the 2019 Bernstein Strategic Decisions Conference in New York, where the results were formally announced.

"Both those numbers were roughly in line with what we expected," Harmening added.

General Mills' fiscal year ended last Sunday and the company will report fourth-quarter and full-year results in late June.

The results were strongest in the February-to-April period, which included Blue Buffalo's rollout in Walmart. When the $8 billion deal came together early last year, executives told investors that a key reason for it was that General Mills, which has relationships with many retailers, would be able to expand Blue Buffalo's distribution in a way that the pet-food company couldn't do on its own.

Goldman Sachs analysts, in a note published after markets closed Tuesday, said they believe the benefits from the Blue Buffalo acquisition are currently peaking in General Mills' financial performance. They expect growth to slow in the next six months as the year-ago comparative base becomes tougher.

Jason English, the lead analyst on the Goldman Sachs note, said he and his colleague always saw General Mills' year as having two distinct chapters. The first with the sales acceleration from Blue Buffalo and the second with a leveling off.

"With the first chapter now having largely played out, in our opinion, we position for the second chapter of mounting deceleration concerns among investors," the analysts wrote.

Goldman Sachs downgraded General Mills shares to a "sell" with a price target of $41. The shares closed at $48.25.

"To be clear, we do believe that management's efforts over the past year will deliver sustainable improvement versus its fundamental challenges over the last few years," English wrote. "We also, however, believe that … evidence of deceleration risk will mount as 2019 advances."