General Mills (NYSE: SIG) is growing again. Just a quarter after announcing lower sales, compared to a period of pantry storage a year ago, the cereal and snack giant said its revenue was now up.
In a presentation to investors this week, the company described a difficult operating environment, with supply bottlenecks and rising prices. But CEO Jeff Harmening and his team are seeing faster growth and accelerating profit gains overall, thanks to fundamental shifts in demand and General Mills’ portfolio.
Let’s look at the highlights of this report to shareholders.
1. Win in a difficult environment
General Mills reported only an organic increase in sales of 2% after adjusting for changes in exchange rates. But the whole picture is brighter than this measure suggests.
Global organic revenue has grown at an annual rate of 6% over the past two years, driven by a combination of rising prices and increasing volumes. The company has also held or expanded its market share in most of its major categories, including grains and pet food.
These victories came despite historic inflation and manufacturing challenges brought on by an understaffed supply chain. “I am proud of the way our team operates in a dynamic and stimulating operating environment,” said Harmening.
2. Brighter profit picture
Gross profitability is down, thanks in particular to soaring input costs. General Mills made up for the collapse with cost cuts, however, so the adjusted operating margin is still higher today (at 18% of sales) than it was before the pandemic hit ( 17% of sales).
Investors can also see this success by tracking earnings over a two-year track. Profits were up 9% on that basis, compared to General Mills’ sales growth of 6% over the period.
The pet food business has been a big contributor here. Consumers are increasingly looking for premium dog food and treats, helping the pet segment to increase annual profits by 20% since 2019.
3. Upcoming portfolio changes
General Mills is not done tinkering with its wallet as it just struck a deal to sell its European business Yoplait, even as it added several new brands to its pet food category.
These measures contribute to a better outlook for the exercise which has just started. Sales are now expected to barely decline from the 2020 surge, executives said. Profits will also be at their previous forecast high.
The updates add weight to management’s claim that there is a new standard in the consumer packaged food industry, with consumers prioritizing cooking and eating at home. At the same time, General Mills is positioning its portfolio to capitalize on niches with the most attractive income profiles, such as pet food.
As a result, investors may want to take a closer look at this stock, which did not follow the stock rally in 2021. General Mills entered the pandemic period with weak operational and financial trends. However, it appears to be on a faster and more profitable growth path, which should reward patient shareholders in the long run.
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