General Mills Earnings: Price Increases Offset Volume Declines in First Quarter; Shares Undervalued

Shares were roughly flat intraday, as the market reacted to few surprises in General Mills’ GIS first fiscal quarter results. We anticipate making a low- to mid-single-digit increase to our fair value estimate of $78 per share for the time value of money and as we revisit some of our assumptions. Even before making the change, we see shares as undervalued. Over the last three months, shares have fallen almost 20%, lagging the Morningstar US Market Index’s 1% increase by a wide margin. We think the market is now overextending recent volume declines as longer-term weakness. But narrow-moat General Mills’ portfolio of strong brands should deliver improved financial performance as the macroeconomic environment stabilizes.

Organic net sales grew 4% from a year ago, primarily from price increases and partially offset by lower volumes. Price increases are likely to slow as consumers are beginning to show increased price elasticity, which should lead to a return to volume growth. Adjusted operating profit margin was down 40 basis points from a year ago to about 18%, as increased brand investment offset higher gross profits. Our long-term outlook for low-single-digit annual sales growth and high-teens operating margins is unchanged.

General Mills’ pet segment (11% of total fiscal 2023 sales) proved particularly weak during the quarter. Flat sales led pet to be the only segment to fail to grow during the quarter. Furthermore, input cost inflation hit the segment particularly hard, leading operating profit margin to shrink to 19.2%, 200 basis points lower from the year-ago quarter. Management expects to see continued short-term challenges for the premium segment weighing on fiscal 2024 results as consumers trade down into value products. However, we think the long-term tailwinds remain, particularly growing pet ownership and humanization.