General Mills Inc. (GIS, Financial) released earnings results last week that were somewhat mixed. However, the company did deliver strong organic growth and also raised its organic growth forecast for the remainder of the year. Let’s look closer at the company and the most recent quarter to see why I believe that General Mills remains an attractive value opportunity in the consumer staples space.
Quarterly highlights
General Mills released third-quarter earnings results for its fiscal year 2022 on March 23. Revenue was up marginally, gaining 0.4% to $4.54 billion vs. the prior-year quarter, which was $8.4 million less than Wall Street analysts had anticipated. Adjusted earnings per share of 84 cents was a 2 cent, or 2.4%, improvement from the previous year and 6 cents ahead of estimates.
General Mills experienced 4% organic growth. Higher input costs resulted in the company raising prices, which added 7% to organic sales. This growth was partially offset by a decrease in volume.
Turning now to segment performance, North America Retail had 1% organic growth. Volume was down slightly as consumers ate out more, but this was more than offset by price and mix. Morning foods and snacks performed well, but meals and baking solution in the U.S. were weaker.
The Pet segment grew 16%, driven by strength in cat food and treats and dog food and treats. Blue Buffalo continues to take market share as General Mills’ $8 billion purchase of the company in 2018 continues to pay off. Raw material costs were higher, but General Mills was able to pass these costs along to consumers without seeing a reduction in volume.
North America Food Service was up 22% as demand for away-from-home channels has almost fully recovered from the Covid-19 pandemic. Schools, restaurants and lodging were the top performing categories.
International was lower by 1%, making this segment the lone within the company to see a year-over-year decrease. Pricing and mix were more than offset by weaker volume and inflationary costs. This business had a difficult comparable period, but Mexican food and ice cream categories have increased their market share so far this fiscal year.
Supply chain constraints remain for General Mills. Certain items, including dough, pizza and hot snacks, were only available on shelves approximately 75% of the time, according to the company, which hindered results. This has since improved to almost 85% in the time since the end of the third quarter, but still trails the on-shelf availability of the company’s remaining products.
The adjusted gross margin fell 160 basis points to 31.4%. Price and mix were not enough to offset inflationary pressure and supply chain disruptions.
Leadership provided updated guidance for the fiscal year as well, with organic sales now expected to increase close to 5%, compared to prior guidance of 4% to 5% growth. Adjusted earnings per share are forecasted to be flat to up 2% compared to prior guidance of down 2% to up 1%.
Takeaways
Top- and bottom-line results were mixed, but organic growth came in well ahead of consensus estimates for General Mills. Even better, management now expects that organic growth will come in at the top end of its previous guidance. Adjusted earnings per share are also projected to be, at worst, the same as fiscal year 2021 or slightly higher.
The last time I looked at the company, I wrote that General Mills was having difficulty with inflation. Higher input costs remain an issue, with most segments experiencing this pain. Inflation also acted as the largest impairment to adjusted gross margins. The company believes that inflationary costs will also be high in the fourth quarter of the fiscal year.
The good news is that the company has used price increases that have helped to offset these headwinds. In some areas, such as Pet, the higher costs have not led to reduce volume. In fact, Pet saw an increase in volume.
General Mills, along with other names in the space, saw business receive very impressive tailwinds from higher demand for at-home food and beverages during the beginning of the Covid-19 pandemic. The company, to its credit, has largely been able to maintain that strength in fiscal year 2022. Two-year organic growth rates for Pet, North American Retail and International are 15%, 6% and 4%, respectively.
North American Food Service is still down 3% over the last two years, but staged an impressive comeback in the most recent quarter with a low 20% gain.
If the other segments are able to continue to expand going forward and food service continues to rebound, then General Mills is likely to report solid growth numbers in future quarters. Considering the company raised its forecast for both organic growth and adjusted earnings per share, it seems that leadership believes that this will be the case in the final quarter of the year.
