General Mills' Outperformance Overshadowed by Reductions in Pet Retailer Inventories; Shares Rich

We plan to raise our $73 fair value estimate for narrow-moat General Mills by a low-single-digit percentage after digesting solid second-quarter performance. Organic net sales popped 11% (price/mix up 17%, volume down 6%), surpassing our 7% forecast. While volume contracted, we view the pullback as tempered relative to the pronounced uptick in price (indicative of the pricing power stemming from its intangible assets). Favorable pricing and cost saves preserved profits, boosting adjusted gross and operating margins 100 basis points (to 33.2%) and 60 basis points (to 16.9%), respectively. As a result of these stout marks, management lifted its fiscal 2023 organic net sales growth to 8%-9% (from 6%-7%) and adjusted EPS growth to 4%-6% (2%-5%). This is north of our 5% and 3% preprint estimates, and we intend to move our forecast toward the revised ranges. While inflation seems likely to persist (with General Mills calling for 14%-15% cost increases this year), we surmise investments in innovation, marketing (anticipated to increase double-digits in the second half), and stepped-up capacity should afford the firm the ability to resonate with cash-constrained consumers.