General Mills Inc. (GIS, Financial) has stealthily been one of the best performers in the S&P 500 Index as the stock has climbed more than 24% over the last year. The index has fallen 11% over that same time frame.
The company reported earnings results on Wednesday that topped analysts’ estimates. Inflationary pressures and supply chain constraints remain an issue, but General Mills appears to have pricing power that can largely offset these headwinds. Shareholders received a dividend increase as well.
Let’s look closer at the company’s most recent quarter to see why investors looking for a safe, defensive stock should consider owning General Mills.
Quarterly highlights
General Mills reported fourth-quarter and fiscal year 2022 results on June 29. For the quarter, revenue grew 8.1% to $4.89 billion, which was $83 million above analysts’ estimates. Adjusted earnings per share of $1.12 compared favorably to 91 cents in the prior year and was 11 cents better than expected.
For the year, revenue grew 5% to $19 billion, while adjusted earnings per share of $3.94 compared to $3.79 in the prior year.
Organic growth for the fiscal year was 6%, but the fourth-quarter total was 13%. Included in the quarterly revenue total was a 400-basis point headwind from divestures and acquisition activity. Driving much of the organic growth was a 14% contribution from higher prices and mix. Organic volumes did fall 2%, however.
The three largest segments within the company saw at least a mid-double-digit improvement in price and mix during the quarter.
Organic sales grew 11% for the North America Retail segment, driven by a 15% combination from price and mix. Gains were seen in U.S. snacks and breakfast foods. Almost two-thirds of products grew or maintained their market share.
The Pet division had organic growth of 22%. Despite higher prices, volume climbed 8%. The Blue Buffalo brand continues to acquire market share and the acquisitions of Nudges and True Chews pet treats were a positive factor in the quarter.
The North American Foodservice business continues to rebound from the worst of the pandemic as organic sales were higher by 25%. Higher demand in key categories led to higher prices, which aided results by 27%. Volume declined just 2%.
International organic growth was 6%, which was composed entirely of price increases and product mix. Volume was flat for the quarter. Market share grew or held by 69% of retail sales.
Looking ahead, General Mills also provided guidance for fiscal year 2023. The company expects organic growth in the range of 4% to 5%. Adjusted earnings per share are projected to be flat to up 3% in constant currency.
The market responded favorably to the company’s earnings report as shares ended the day 6.4% higher.
Takeaways
General Mills did benefit from lapping the weakest quarter in the prior fiscal year, making for a somewhat easy comparable period. The fourth quarter of fiscal 2021 saw revenue down almost 10% from the pandemic-aided prior year. That said, sales were up more than 22% from the pre-pandemic period, which should be a sign the company is not just relying on Covid-19-related demand to grow. Adjusted earnings per share are also ahead of pre-pandemic totals.
The fourth quarter finished off a strong fiscal year. Each quarter saw a sequential improvement in organic price and mix, another piece of evidence that shows raising prices has not driven customers away. The ability to have pricing power when inflation is running at levels not seen in decades is a significant competitive advantage for General Mills and is not something many peers are experiencing.
Organic growth for the year turned out to be much better than the company had initially expected. At the start of the fiscal year, General Mills had forecasted organic growth in a range of down 1% to down 3%. Producing 6% growth for the year speaks to the strength of the company’s brands.
General Mills appears to be handling inflationary pressures as well as can be expected under the circumstances. The company recorded a double-digit gain from higher prices, with demand falling just slightly. Even in an inflationary environment, it took market share in most areas. This shows its brands resonate with consumers and they are willing to pay more for the company’s products. These are invaluable assets to have given the inflationary backdrop.
It should be noted the company is not completely immune to higher input costs and supply chain constraints. The adjusted gross margin fell 70 basis points to 33.8% as inflation was a double-digit headwind to results. Higher costs of goods sold also impacted the gross margin.
On the other hand, the adjusted operating margin climbed 200 basis points to 18.3% due to lower selling, general and adminstrative expenses as a result of the company’s cost savings program.
Most product categories are seeing a high rate of on-shelf availability, except for refrigerated dough, pizza and hot snacks. These categories are running below the overall portfolio, though on-shelf availability has gotten much better since the middle of the third quarter.
Finally, company guidance for fiscal 2023 is solid, though leadership does expect inflationary costs to be close to 14% of cost of goods sold. This pressure will be partially offset by cost increases and the cost savings program. Volume could see a small decline again, but consumers have shown over the past few quarters that high prices for General Mills’ products are not much of a deal breaker.
Leadership’s expectation for 4% to 5% organic growth is in line with the company's performance over the past several years, showing how consistent its business has been in the medium term.
Final thoughts
General Mills’ most recent quarter showed the power of being able to raise prices without facing a substantial impairment to volume. The company’s products remain in high demand even after a small reset following elevated buying related to Covid-19.
In addition, General Mills raised its dividend nearly 6%. The company has now paid continuous dividends since 1898, a lengthy streak that not many others can match. Shares yield 2.9%, nearly twice the average yield for the S&P 500 Index.
General Mills’ stock is trading at nearly 19 times the midpoint of forward earnings, which is slightly ahead of the 10-year average price-earnings ratio of 17, according to Value Line.
That said, investors looking for a company with proven pricing power and the ability to withstand the worst of inflation could find General Mills an attractive investment option based on its market outperformance and solid yield.
