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50 percent of Americans start their days with cereal.
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General Mills: Cereal Outperformer?
Cheerios manufacturer General Mills (GIS) benefits from the US’ highest inflation in 40 years. The company expects inflation-led price hikes to further aid sales in the upcoming fiscal year. The stock is also known to outperform in challenging market cycles. Will the trend continue?
Making Cereals Great Again!
In 2020, Americans had a reason not to visit restaurants - the pandemic. As a result, they warmed up to cereals again after leaving them in cold storage for years (pun intended). Sales of ready-to-eat cereals in the US crossed $9B in 2020, but that number fell 7% in 2021 to $8.4B but remained well above pre-pandemic levels.
Today, Americans have another reason not to visit restaurants - inflation, which is at the highest level in four decades. Bills burning a gaping hole in their pockets have prompted consumers to eat more often at home, leading them to warm up to cereals again!
Another area where spending is seeing no signs of slowing down is pets - inflation or no inflation. A report from the American Pet Products Association shows that 35% of owners spent more on pet supplies over the last 12 months, and more than half of them are willing to spend even more on eco-friendly products!
But how are the two linked?
Pet food is the second largest growing business for General Mills, and the company is known for selling one of the world’s biggest cereal brands - Cheerios!
Founded in 1928, General Mills is known for creating its iconic trademark, the fictitious homemaker Betty Crocker, and packaged food products like Wheaties, Bisquick, and Cheerios.
General Mills has its products marketed across 100 countries and six continents. The company outlined the “accelerate strategy” in February last year to focus on competitive advantage in the market. It based the strategy on brand building, new solutions to consumer problems, investing in data and analytics, and enhancing core capabilities.
Through this strategy, the company intended to generate profitable growth by prioritizing investments in eight key areas, including the US, Canada, France, India, and others. It also planned on focusing its portfolio mix across areas like cereal, pet food, ice cream, snack bars, and Mexican food.
Higher The Inflation, Greater The Benefits?
The strategy, along with higher inflation, aided General Mills’ earnings during the quarter that ended in August.
Key Highlights From Q1 FY23:
Revenue: $4.72B Vs $4.72B expected
Earnings Per Share: $1.11 Vs $1.00 expected
Year-on-Year, the company’s revenue increased by 4%, driven by higher prices, which added 15 percentage points to the topline. However, the amount of food sold during the quarter fell compared to a year ago.
General Mills expects costs to rise 15% in the new fiscal year, higher than its double-digit forecast in June. The latest estimate accounts for a rise in raw material, labor, freight, and fuel charges.
The management on the earnings call admitted that consumers are resorting to value-seeking behavior as going out to restaurants gets increasingly unaffordable. US food prices rose 13.5% in August, the fastest since March 1979.
Organic sales for the quarter, which exclude the forex adjustments, acquisitions, and divestitures, increased 10%. The company now expects 6-7% organic growth, higher than its earlier guidance of 4-5% growth. It also expects adjusted EBITDA for the year to be flat or rise 3%, while adjusted EPS is likely to grow 2-5%. Changing packaging sizes and charging more per ounce are other measures the company takes to improve profitability.
US consumer confidence during the first half of 2022 has declined below the levels seen during the global financial crisis of 2008-2009. Besides curbing restaurant spending, people also cut back on ordering food as it is costlier than preparing meals at home. All of this may be a blessing in disguise for General Mills.
The company’s shares have outperformed the broader market in all three instances of low consumer confidence during the last two decades. For example, between 2001-2003, General Mills’ shares gained 5.4%, compared to a 32% drop in the S&P 500. Similarly, between 2007-2010, the stock gained nearly 23% while the benchmark index declined 21%. Shares outperformed the index between 2011-2013, gaining 14%, compared to the index’s 13%.
The company expects consumers to become more price sensitive over the next three quarters. Analysts find General Mills to be resilient to inflation pressures and that their wide range of products and price points will give consumers sufficient options to trade down but not out of the company’s range.
Consumers spending less is never a good sign for any economy. However, less is turning out to be more for General Mills as their cereals are starting to find favor from consumers again. The stock is up 20% this year, is trading near a 52-week high, and is outperforming the benchmark index. Inflation or not, investors are certainly not complaining while happily munching on their cheerios!
Market Reaction
GIS ended at $80.78, up 1.33%.
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