“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%.
Segments
N.A. Retail price/mix decelerated by 3% sequentially, and volumes improved by 3% sequentially. Sales outperformed the scanner data due to faster growth (10%) in non-tracked channels and a modest rebuild of inventory. U.S. snacks were up 8%, U.S. morning foods were up 3%, Canada morning foods were up 4% in constant currencies and flat as reported, and U.S. meals and baking solutions decreased 1% due to the divestiture. Segment operating margins were flattish due to higher price/mix offset by higher input costs, lower volume, and higher SG&A.
Pet price/mix decelerated by 4% sequentially, and volumes decelerated by 3% sequentially. Dry food was up MSD%, wet food was flat, and pet treats were down double digits. Wet pet food improved from -HSD% in FQ4, but pet treats saw a significant decline from FQ4 despite the expectation that its progress would follow dry food. Operating margins contracted due to higher input costs, lower volume, and higher SG&A, somewhat offset by price/mix. The outlook for input costs in pets along with external suppliers providing capacity, will keep the segment’s margins under pressure.
N.A. Foodservice price/mix decelerated by 4% sequentially, and volumes accelerated by 4% sequentially. Market index pricing for bakery flour was a 6% headwind. Operating margins expanded due to price/mix partially offset by higher input costs.
International price/mix decelerated by 5% sequentially, and volumes accelerated by 10% sequentially. Operating margins recovered from last year’s product recall and price/mix partially offset by higher input costs.
Margins
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%.
Outlook
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.
