Inflation is playing on the side of General Mills
General Mills Inc. (GIS) presented results for the fourth quarter of the fiscal year 2022 (ended May 29), stating that the price increase allowed revenue to increase in the reporting period by 8% YoY, to almost $4.9 billion, despite a decrease in operating indicators in all segments. According to the company’s expectations, high inflation will continue shortly. As a result, management estimates costs will grow double-digit over the next year.
Around the same time, the corporation wants to reduce expenses more and increase selling prices to relieve the impact on profits. The management explains the recent increase in GIS sales as a combination of increased fees and active demand for more profitable products compared to other assortment options. This surge helped offset rising costs and declining sales in all segments except the company’s fast-growing pet products business. General Mills CEO Jeff Harmening said the company was able to maintain the position of its brands in stores despite significant inflation and supply chain disruptions. General Mills raises the cost of its products through various measures, including increasing selling prices and changing the size and shape of packaging to receive a higher fee per ounce.
The company predicts sales will grow by 4-5% in the fiscal year. Overall, GIS’ profit almost doubled in the quarter, reaching $822.8 million, or $1.35 per share, from $416.8 million, or $0.68 per share, earned in the same period a year earlier. General Mills reported adjusted earnings of $1.12 per share, excluding asset sales and other one-time items. Analysts surveyed by FactSet expected adjusted EPS to be $1.03. Sales of $4.89 billion also slightly exceeded experts’ expectations. We estimate the report for the fourth quarter as ambiguous.
On the one hand, the company beat the consensus on revenue and profit. Raised dividends by 6% and organic sales increased by an impressive 13% for a food company. However, this was primarily due to rising prices.
At the same time, it is essential to note that the rise in the price of goods led to a 2% reduction in sales. Although a significant part of this decline was due to the sale of foreign assets, the pet food business was the only division demonstrating an increase in volumes. The price increase, of course, supports the importance of revenue at the moment but, at the same time, encourages consumers to consider cheaper alternatives. Despite the optimistic report and guidance from management, we believe that may shake the position of General Mills as inflation accelerates. We still do not see significant points for sales growth, although the company’s latest report indicates the opposite. As a result, we are adjusting the target upward, but we do not consider the purchase of shares at current prices an attractive investment.
