The cereal boom is over. General Mills (NYSE:GIS) this past week announced that sales growth turned negative in early 2021 after soaring over the previous year. And while prices jumped at a double-digit rate in some of its sales channels, that boost wasn’t enough to offset slumping volume.
Executives sounded confident that the business is in a stronger position than it was a year ago. But General Mills might still struggle to avoid reduced sales in the fiscal year that just started.
Let’s take a closer look.
Rising prices and falling volume
The good news on growth is that General Mills returned to solid gains in its convenience store and restaurant segment, which had been pummeled during the pandemic. The company also managed much higher average prices in its core U.S. business and in China and Latin America thanks to higher selling prices and a continued shift toward premium cereal, yogurt, and snack products .
Still, sales volumes shrank as compared to a surging year-ago period that included significant pantry stocking in the early phases of the pandemic. Volume was down 12% overall compared to a 5% increase in the previous quarter.
Management said the results were encouraging, considering that sales have grown at a 4% compound annual rate over the past two years. That pace is better than the company was doing before COVID-19 started scrambling demand trends. “I’m pleased with the results the General Mills team delivered under difficult circumstances,” CEO Jeff Harmening said in a press release.
Earnings and outlook
The news was better on the earnings front. Adjusted operating margin dipped by just 1.4 percentage points to 16.3% this quarter. That’s still better than the 15.8% the company reported three months ago and supports management’s claim that the business is becoming fundamentally more profitable.
Innovative product launches, cost cuts, and efficiencies from the higher sales footprint are all combining to boost General Mills’ earnings power. Recent acquisitions like the Blue Buffalo pet food brand are also helping lift margins.
The company sees higher consumer demand continuing even after the pandemic threat fades. There’s a new interest in cooking at home and baking that won’t disappear, it predicts. That lift will be offset by pressures that likely keep its restaurant division weak compared to 2019.
As a result, investors are in for a rougher year ahead than the one that just closed. General Mills sees organic sales falling between 1% to 3% in fiscal 2022 as adjusted profits fall by between 2% and 4%. Fiscal 2021 showed 4% sales growth and 3% higher profits.
Those declines should still leave General Mills in a stronger growth position in 2022 than it was before COVID. But it might take until at least the end of that year before shareholders can be confident that the pandemic lift was more than just a one-time boost for the business.
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