Why General Mills is still a buy despite its missed profits

Branded food giant General Mills (NYSE: SIG) saw its share price drop more than 4% on December 21 when it reported a shortfall in its second quarter of fiscal 2022 (Q2). While its stocks have rebounded somewhat since then, the factors that led to its earnings failure – inflation, rising spending, and its decision not to raise prices – all remain.

However, the business still has a long way to go and deserves to be viewed as a longer term investment. Here are two important things to take away from her current situation.

Rising income, missed income

Triggering against Wall Street, General Mills saw its net income fall 13% year-on-year to $ 597 million in the second quarter. The culprit: rising spending. The company recorded a 400 basis point decline in gross margins and a 350 basis point decline in operating margins. Those drops would have been bigger if General Mills hadn’t raised prices somewhat, but those increases still weren’t enough to offset the spike in spending. At the same time, revenues increased 6% from the second quarter of last year.

Image source: Getty Images.

The company recognizes its current challenges. As CFO Kofi Bruce noted on the second quarter earnings conference call, General Mills is experiencing “an eight-to-ten increase in the number of disruptions in our supply chain” with similar disruptions expected until the end of its fiscal year (mid-2022). Inflation for the cost of ingredients has been set between 8% and 9%.

When asked if the company intends to raise prices to offset increased spending, North American Retail Group chairman Jonathon Nudi replied that General Mills “is trying to get a vision. long term from a price point of view ”while CEO Jeffrey Harmening added that“ in the longer term … the supply chain will become more efficient. ”To that end, General Mills has taken steps to improve its own internal supply chain.This includes building strong and productive capabilities in Asia, which the company says will help keep costs down.

Can General Mills handle future disruptions?

General Mills, in short, is avoiding full-blown price hikes because it seeks to stay competitive – and hopes inflation problems ease and supply chain improvements lower costs. But could the company cripple itself by refusing to raise prices, which would increase profits and regain investor confidence?

The answer depends in part on the duration of supply chain problems and inflation, with analysts giving vastly different predictions. The Wall Street Journal expects the Biden administration’s policies, including raising the federal debt to 123% of GDP, to continue to drive inflation for years.

The Federal Reserve, on the other hand, estimates that inflation could fall to 2.2% by the end of the third quarter of next year – and even lower in 2023. At its press conference on 15 December Federal Reserve Chairman Jerome Powell said: “We continue to expect inflation to drop to levels closer to our longer-term target of 2% by the end of the year. ‘next year.” This is a much more optimistic forecast and would be ideal for General Mills if correct.

In my opinion, General Mills is relatively well positioned to overcome both supply chain and inflation hurdles. But if these problems persist, the company still has the option of raising prices, which won’t make it much less competitive since its competitors will also have to meet similar conditions.

The two-year picture (comparing 2021 to pre-pandemic 2019) is more encouraging, showing that General Mills has increased both its bottom line and bottom line – a fact obscured by today’s inflationary trends. So, under the temporary storms of supply chain bottlenecks and an inflation-plagued economy, a clear growth path continues.

General Mills remains focused on future growth

During this time, General Mills does not stand still and does not give in to its past successes. On the contrary, it seems to react flexibly to changing conditions.

For example, it is focusing on developing its pet food category, which is experiencing increasing demand. Its acquisition of the Nudges, True Chews and Top Chews pet treat brands from Tyson Foods earlier this year, its second-quarter pet food revenue climbed to $ 593 million, a 29% year-over-year increase. The acquisition accounted for about half of the gain, with solid organic growth providing the remainder. CEO Jeff Harmening believes that General Mills has “a long line of strong and profitable growth ahead for our combined pet food business.”

Certainly, current trends confirm this. About 10 million more pets have now been kept in North America since the arrival of COVID-19, according to research from grain company Scoular. Not surprisingly, sales of pet food were also up, increasing 6.9% for the 52 weeks ended November 27. That’s three times the increase in food sales overall, according to NielsenIQ. (NYSE: NLSN) research reported by The Wall Street Journal.

General Mills is also taking the initiative to strengthen its global presence. Around a third of its turnover is now generated internationally, in particular thanks to strong growth in Asia and Latin America. Operating income was also up in the convenience store and foodservice category, up 20% year-over-year for the quarter and 33% for six months as the “grand reopening” ends. continues.

As inflation and supply chain disruptions cause problems for the company’s bottom line, people – and their pets – still need to eat, and General Mills appears to be positioning itself to stay lean and competitive among food stocks. It is worth considering as a potentially tasty investment.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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