General Mills Earnings: Headwinds Abound but Unwavering Brand Spending To Buoy Its Competitive Edge

While the market dogged General Mills GIS after its fourth-quarter print—shares slipped 5%—we don’t see any material change to our $78 fair value estimate, rendering shares fairly valued. Organic sales popped 5% in the quarter, as an 11% hike in prices offset a 6% downdraft in volumes. However, management suggested the consumer has been resilient, despite confronting higher prices at the shelf. Rather, the firm attributed a portion of the volume decline to a reduction in retailer inventories (a 3-point headwind in the quarter). Although competitors haven’t highlighted such angst yet, we don’t posit these actions are unique to General Mills and anticipate such musings will gain more airplay over the coming weeks. And to counter this pressure and support its brands and retail standing (factors that underpin its narrow moat), we don’t think the firm intends to back down from prudently spending behind consumer-valued innovation and marketing (up double digits in the quarter); we forecast it will expend nearly 6% of sales on average annually ($1.3 billion) toward such efforts.

Even as it has spent behind its brands, capabilities, and capacity, General Mills eked out margin expansion in the quarter, driven by higher prices and its unrelenting focus on extracting inefficiencies from its operations. The adjusted gross margin popped 120 basis points to 35% (generally in line with its historic prepandemic average). Management stressed inflation remains a challenge, particularly as it relates to labor at suppliers, co-manufacturers, warehousing and logistics, as well as its own plants, and these higher costs are slated to represent 5% of cost of goods sold in fiscal 2024. While the firm didn’t convey its intent to raise prices further, we surmise it will continue to employ its full arsenal to blunt the hit to profits. When taken together, we continue to forecast low-single-digit annual sales growth and high-teens operating margins longer term.