Margin inflection (GIS)
General Mills reported a strong quarter with inflation and price increases grossing up results while margins continue to improve as price increases accelerate. General Mills reported FQ4 EPS of $1.12 vs. consensus of $1.01, up 23% YOY. Organic sales growth of 13% was above expectations in each segment. Volumes decreased 2% while price/mix increased 14%.
Gross margins contracted 70bps YOY, improving from -350bps sequentially. Cost inflation was double digits and the supply chain costs deleveraged, but price/mix and costs savings partially offset the headwinds. Management said price elasticity has not changed likely due to a shift to at-home consumption while the consumer is in “a decent place” financially. EBIT margins expanded 200bps YOY, improving from -90bps sequentially.
Management guided F2022 organic revenue to grow 4-5%. Organic price/mix is expected to be up 6%. Inflation is expected to be up 14% while price/mix is expected to be up low double digits. Operating profit is expected to be down 2% to up 1% with M&A as a net 3% headwind. EPS guidance is for flat to +3% growth.
For the best positioned companies, we have already had the margin inflection of less bad. General Mills has seen operating margins expand and gross margins are not far off. We are above management’s guidance which does not include any additional M&A. General Mills is on our long list.
Pulling the plug on Bevy Long Drink (SAM)
Boston Beer announced that it has discontinued Bevy Long Drink, the company’s malt-based offering in the Finnish long drink category. The company launched the drink in 20 test markets at the end of 2021 and rolled it out nationwide earlier this year. The Finnish long drink is a traditional cocktail of gin, grapefruit soda, and tonic. Boston Beer’s version was malt-based and did not have gin to avoid being classified as a spirits-based drink which has smaller distribution and higher taxes. Boston Beer has numerous other new products it is trying to support including Hard MTN Dew and Agave Cocktails, and collaborations with Pepsi and Beam Suntory. Pulling the plug on collaborations will not be as easy. One of the signs of a good management team is to know when to cut an underperformer early enough.
Canopy Growth exchange notes (STZ)
Constellation Brands announced that through its wholly-owned subsidiary it agreed to exchange C$100M of principal notes due in 2023 for common shares of Canopy. The transaction is part of a C$255M notes exchange for common shares. The share price will be based on the ten day volume-weighted average trading price of the shares between $2.50 and $3.50 per share. Depending upon the share price Constellation Brands will receive between 5.4% and 7.6% of the outstanding shares of Canopy Growth. For the C$200M principal amount of notes Canopy Growth will only be able to convert any note with cash settlement. As a result of the exchange, Constellation Brands will own ~35.8% of the shares or assuming full exercise of the warrants between 50.3-50.7% of Canopy Growth shares. The exchange comes on the heels of the credit downgrade for Canopy.
Canopy Growth is becoming more like a deadbeat brother who keeps needing money rather than an investment in a rapidly growing sector to create a fourth category for Constellation Brands. It is more important than ever for shareholders to gain voting control over the company to prevent further capital mismanagement. One could argue the notes may not be worth that much anyway, but they are worth more than the common stock.
