FQ1 Review (GIS)
“Now the cost of eating out is roughly 4x what it is eating at home. So as consumers get more squeezed, and as people get in their normal routines in the fall, we would think that at-home eating will probably pick up a little bit.” – General Mills CEO 9/20/23
General Mills reported FQ1 EPS of $1.09, a penny above expectations. Sales were in line, gross margins were better, SG&A was higher, and below-the-line items were higher than expectations. Organic sales grew 4%, with price/mix growth of 6% offset by a 2% volume decline. In FQ4, price/mix increased 11%, and volumes decreased 6%.
Adjusted gross margins expanded 50bps YOY, driven by price/mix, partially offset by higher input costs. Operating margins contracted 40bps due to a double-digit increase in marketing spend. Interest expense was $.05 higher YOY. General Mills repurchased 6.4M shares for $500M during the quarter, and the diluted share count decreased 2%.
Management reaffirmed sales and earnings guidance for the year. N.A. Retail is expected to see volume improve as price/mix moderates and the other strategies drive growth. The pet sector is expected to remain challenging due to consumer headwinds. Foodservice and International are expected to be “nicely additive” to growth this year. Input cost inflation is expected to be 5%, with cost savings offsetting 4% points of that.
We are lowering General Mills slightly on our position monitor, acknowledging that despite the inflection in volume trends, the concern will still be a headwind for the foreseeable future. However, the valuation is compelling at 14x consensus EPS expectations for the out year or 14.7x the current fiscal year. The company has proven its ability to take price with industry cost pressures to protect margins, and we do not expect price/mix will be competed away. For further details, please see our separate note.
Position Monitor Changes (LW, CELH, MNST, GO)
We also moved several other companies higher and lower on our list, reflecting:
Lamb Weston – more conviction in industry capacity growth and its limited impact on volume expectations moves the company higher on our long list.
Celsius Holdings – visibility in retail sell-through and channel checks raises the company higher on our long list.
Monster Energy – volumes decelerating in tracked channels move the company lower than the aforementioned companies.
Grocery Outlet – Higher gas prices or consumer headwinds have broadly led to weaker traffic trends in food retail, but Grocery Outlet continues to be a notable outlier as seen below. We are raising the company on our long list.
DTC Wine (NAPA)
According to Wine Business Analytics, DTC wine shipments fell by 10% YOY in August, decelerating from the 2% decline in July. Wine volumes fell by nearly 12%, similar to the 11% decline in July. The average price per bottle is less than 2% higher than the prior year. The wine industry has had difficulty passing on higher prices. In August, the CPI for wine at home increased 1.0% YOY, decelerating from 1.8% in July. The Duckhorn Portfolio has more successfully passed on higher prices than most of its peers.
