Gross margins expand (GIS)
General Mills reported FQ1 EPS of $1.11 vs. consensus expectations of $1.00. Organic revenue growth was 10% with volume declines of 5% and price/mix gains of 15%.
- North American retail organic sales grew 12% with operating profit growth of 20%, accelerating from +11% and 18% respectively in FQ4. Volumes decreased 5% while price/mix grew 17%. 75% of the unit decline was said to be due to a pullback in promotions. The snacks unit had the fastest growth rate of 14%, while meals and baking solutions grew 10%, morning foods grew 9% and Canada grew 7% in constant currencies
- The Pet segment grew 14% with operating profit growth of 7%, decelerating from +22% and +10% respectively in FQ4. Volumes decreased 3% while price/mix grew 17%. Management said capacity constraints led to share declines in dry food.
- North American Foodservice grew 18% with operating profit declines of 25%. Bakery flour index pricing contributed 17% to sales growth. Cost inflation of 20% outpaced price increases, as price/mix combined was up 17%.
- International sales decreased 2% while operating profit decreased 34%. A combination of an ice cream recall, divestitures, higher input costs, and lower volumes offset price/mix growth and lower SG&A.
Adjusted gross margins expanded 20bps YOY, improving sequentially from -70bps. Price/mix and cost savings were partially offset by higher input costs, bakery flour index pricing, and supply chain deleverage. Management feels confident with the price increases already in the market or announced that inflationary pressures have been offset. Adjusted EBIT margins expanded 70bps YOY, 150bps above expectations.
Management raised revenue guidance to 6-7% from 4-5%. EBIT growth was raised to flat to +3% from -2% to +1%. EPS growth was raised to 2% to 5% from flat to +3%. Management cited lower volume elasticity, higher input cost inflation of 14 to 15%, increased investments, and the ice cream recall as elements that have changed since the last call. General Mills is well positioned for the inflationary environment and Quad 4. Our EPS estimates are above consensus expectations and there is upside in the current valuation.
Grocery preferences (WMT, GO, BJ, KR, ACI, SFM)
According to dunnhumby’s fifth annual U.S. retailer preference report, value creation drives customer preference, which translates into higher financial performance and emotional connection. The leaders last year were Amazon, H-E-B, Market Basket, Trader Joe’s Costco, Publix, Aldi, and Wegmans. Within customer benefits and costs no retailer has a competitive advantage in both as retailers make tradeoffs.
Retailers that were in the 1st quartile for price included Grocery Outlet, Walmart, Aldi, Price Rite, and Costco. Retailers that have price-focused strategies have superior growth rates during the pandemic and long-term.
Retailers in the 1st quartile for quality included Sprouts Farmers Market, Costco, Publix, and Harris Teeter. Value amplifiers including rewards, convenience, speed, and operations boost a customer’s perception of overall value and can offset price perception.
Retailers in the first quartile tend to make their tradeoffs by focusing on making the value proposition highly compelling on fewer SKUs like Trader Joe’s, Costco, Sam’s Club, and BJ Wholesale. The report illustrates an important lesson in grocery, over the long-term low prices leads to faster growth.
Strawberry indoor facility (APPH, KAL)
Plenty has broken ground on what it says will be the largest indoor vertical farm in the world near Richmond. The $300 million plant will be built on a 120 acre campus and is expected to have its first harvest by late 2023 or early 2024. The company says annual production could exceed 20 million pounds of strawberries, leafy greens, and tomatoes. Initially, the company will produce Driscoll’s proprietary strawberries for distribution in the Northeast. Plenty’s new farm in Compton, California is expected to come online later this year and it will supply all Walmarts in California. Walmart announced an investment in Plenty in January. Plenty has also received funding from SoftBank. Walmart and SoftBank both cited Plenty’s success with yields for their investments. Yield has been a challenge for AppHarvest. In comparison, AppHarvest’s Morehead, Kentucky facility spans 60 acres. Indoor grow companies continue to find ready access to capital, both a blessing and a curse when barriers to entry are low.
