General Mills continues to be in demand
General Mills Inc. (GIS) reported failing to meet Wall Street’s profit expectations for the second quarter of the fiscal year 2022 (FY). Cheerios cereal producer has faced a sharp rise in raw material prices and higher logistics and labor costs due to prolonged disruptions in supply chains, a shortage of truck drivers in the United States.
Important to note that the rise in the price of wheat, corn, and edible oils put pressure on the margins of all industry organizations. To compensate for the increased costs, General Mills, like some comparable companies (Kraft Heinz Co. and Campbell Soup Co.), raised the prices of its products. However, inflation and logistics costs grew faster this quarter than selling prices for General Mills products, as stated in the presentation by GIS CEO Jeff Harmening.
The company continues to optimize pricing, increasing the cost of manufactured goods. As a result, GIS products will be at new prices in the current quarter. In addition, it is a further rise in price in the next six months. The positive aspects of the presentation include the upward revision of the full-year sales guidance due to high demand for the company’s grain and bakery products and pet food, which allowed to increase net revenue for the reporting period by 6%.
According to the new expectations of management, in FY2022, net organic sales will grow by 4-5%. Earlier, the company predicted that this indicator would decrease by 1-3%. Net revenue for the reporting period amounted to $5.02 billion, exceeding the estimate of $4.84 billion. Excluding one-time items, General Mills earned $0.99 per share, which, on the contrary, was lower than analysts’ estimates at $1.05.
We consider the company’s report for the second quarter of FY2022 to be relatively weak. However, it was pretty predictable since problems with rising prices for raw materials and a shortage of drivers put pressure on all industry companies. In our opinion, General Mills and many other comparable organizations make a mistake, compensating for increased costs by increasing selling prices. An effective way to deal with such a situation is to hedge production risks, and, from our point of view, management will eventually have to resort to this tactic. It allows you to fix the prices of raw materials and better control pricing.
Despite the decline in organic volumes in most sales channels, demand for products remains high, except for convenience stores and the pet food segment. A change in consumer behavior will explain this after a period of restrictions. Considering all the above considerations, we leave the target price on paper.
