FQ2 plans change (GIS)
General Mills reported FQ2 EPS of $1.25, ahead of consensus expectations by $.09. The upside was driven by higher margins while revenues were below expectations.
Organic revenue growth was -2 %, below expectations of 3% growth. Volumes decreased by 4%, and price/mix increased by 3% compared to FQ1’s 2% volume decline and 7% price/mix increase.
- N.A. retail sales decreased by 2%, with volume down 5% and price/mix up 4%. Snacks and morning foods sales were down MSD% while meals and baking solutions were up LSD%. Margins improved due to pricing and cost savings.
- Pet sales decreased by 4%, with volume down 11% and price/mix up 7%. Dry pet food sales decreased MSD%, wet pet food decreased by double digits, and treats were up by double digits. Segment margins recovered due to pricing and cost savings.
- N.A. foodservice sales were flat, with volume down by 1% and price/mix up by 1%. Segment margins recovered cost savings and price increases. Margins recovered from the ice cream recall, price increases, and cost savings.
- International sales increased by 2%, volume down by 4%, and price/mix up by 3%.
Gross margins expanded by 180bps YOY, improving from +50bps YOY in FQ1 (which is roughly what consensus expectations were for FQ2). Operating margins expanded by 240bps. Corporate expenses decreased by $39M, mostly due to lower compensation and benefits expenses.
Management guided organic sales to decrease by 1% to flat for the year, down from 3-4% growth previously. The company now expects a slower volume recovery in 2024 due to “a more cautious consumer economic outlook and a faster normalization of competitive on-shelf availability.” Management said private label and smaller brands have seen much improved in-stock levels. Input cost inflation is expected to be 5%. EBIT and EPS are expected to increase by 4-5%, down slightly from 4-6%.
General Mill’s volumes weakened despite taking less price, altering management’s plans for the year. 2023 exceeded plans every quarter, and 2024 will be much more challenging to plan.
Tariff suspension (DEO)
The U.S. and the EU reached an agreement to extend a suspension of EU tariffs on whiskey imports from the U.S. The 50% tariff would have taken place at the start of 2024. The suspension will last until at least March 31, 2025.
The whiskey tariff was tied to a broader steel and aluminum dispute between the U.S. and the EU. After the EU set a 25% tariff on U.S. whiskey, exports fell from $552M to $440M from 2018 to 2021. After the suspension of the tariff in October 2022, whiskey exports increased 29% in 2022, reaching pre-tariff levels. For the suspension to go into effect, the U.S. still needs to extend a suspension on steel and aluminum taxes. The frequent changes in tariffs are challenging for an industry that produces some of its products over a number of years, but the suspension avoids a negative scenario. The larger distillers have an advantage in navigating tariff changes and regulatory changes in foreign markets.
Organic Produce Survey (SFM)
The Packer’s Organic Fresh Trends 2024 survey polled more than 1,100 consumers about their organic produce purchases in mid-October. 23% of respondents said they purchased their organic produce from specialty markets like Whole Foods and Sprouts, 25% said chains superstores, 11% said warehouse clubs, 20% said supermarkets, 9% said chain discounters and 11% said farmers markets. The percentage of organic purchasers who choose organic produce for more than 75% of their produce fell to 5% in the latest survey compared to 10% last year. The number one consideration for organic purchasers was whether the higher price of organic produce was worth it for the health advantage, which was cited by 61% of respondents. Something has to give with food inflation, and for some, trading down from organic is the choice.
