General Mills Misses Revenues, Sees Strong Margin Expansion In Most Recent Earnings Report
Cost savings are leading to bottom-line earnings beats.
At the time of writing this article, I own shares in General Mills, GIS. This article is for entertainment only, and is not investment advice.
While we saw a slower-than-expected volume recovery in the second quarter, we generated growth on the bottom line thanks largely to our strong performance generating Holistic Margin Management cost savings.
Wall Street Did Not Like General Mills’ Report
Wall Street was not impressed with the report General Mills gave yesterday (Wednesday, December 20th), missing the top line but beating the bottom line of expectations. Unlike Wall Street, I try to take away positives over the negatives. As I’ll get in to, I think what we saw with General Mills will be a recurring theme for food and beverage stocks into 2024, but a promising sign for when market conditions improve. Let’s get into General Mills’ Q2 2024 earnings report!
Revenue Misses, Earnings Beat
General Mills reported the following top and bottom line numbers for Q2 2024:
Revenue of $5.14 billion, missing expectations of $5.36 billion.
EPS of $1.25, beating expectations of $1.16.
That top line miss, along with narrower guidance which we will discuss later, caused shares of GIS to dip on Wednesday, after an already tough year. Management attributed this to “slower-than-expected volume recovery”, which was a major story across all segments:
This is a story that I truly did expect to start recovering by now, and management using the words “slower-than-expected volume recovery” means they were likely just as surprised as I was. Despite volumes not coming in as expected, bottom line earnings beat expectations, which may have saved this stock from a much bigger drop.
Margins are improving across the board for General Mills, thanks to their HMM (Holistic Margin Management) cost savings. We can attribute the bottom line earnings beat to HMM this quarter, with adjusted gross margins up 180 basis points to 35%, adjusted operating profit up 240 basis points to 19.3%, and adjusted net profit margin up 140 basis points to 14.1%, all while Net Sales decreased 2%. These margins are adjusted for comparability due to acquisitions and divestitures in the past year.
When companies know they will have struggles with growing revenue during periods of time, they turn to create efficiency and expand margins to grow earnings. This worked tremendously well for General Mills this quarter, and I believe this will be a very positive catalyst moving forward. Once management can find ways to grow their top line revenue, margins have the potential to explode as the cost savings can be realized at a larger scale. This may take time to play out, but I do believe once volumes recover we could see great growth in earnings from General Mills as the HMM cost savings go into full effect.
Breaking Down the Segments
As the operating environment evolves, we are adapting our plans to compete effectively amid a demand outlook that is more challenging than we initially expected.
North American Retail net sales fell 2%, driven by lower pound volume, partially offset by favorable pricing and mix. While lower, net sales did outpace Nielsen-measured retail growth in the U.S. In this division, U.S. Meals & Baking Solutions was up low-single digits and Canada was up high single digits, while U.S. Snacks and Morning Foods were down mid-single digits.
The Pet segment has proven difficult in past years for General Mills, but I see signs of improvement. Net Sales fell 4%, driven by lower pound volume, partially offset by favorable pricing and mix. Dry pet food fell mid-single digits, wet pet food fell double digits, while pet treats were up double digits compared to last year. Operating profit increased 18% compared to last year despite the 4% decline in net sales. This segment, in my opinion, has the potential to grow earnings very rapidly if they can strike a balance of volumes and pricing to grow the top line.
North America Foodservice was essentially flat at $582 million in net sales despite a 2-point headwind from market index pricing on bakery flour. Segment operating profit jumped 17% for the quarter driven primarily by HMM cost savings and favorable pricing and mix, partially offset by supply chain costs. This segment should expect to see faster-than-average growth as a positive benefit from the TNT Crust acquisition in fiscal 2023.
International segment net sales increased 2% driven by favorable pricing and mix and a 2-point benefit from foreign currency exchange, partially offset by lower pound volume. This 2-point benefit from foreign currency exchange is a big deal in my opinion, but will likely be overlooked. If companies like Coca-Cola, Pepsi, or even Procter & Gamble can start seeing foreign currency benefits we could see earnings absolutely explode over the next year or two. That said, I don’t want to overreact to one positive quarter of foreign currency exchange, and will continue tracking this moving forward.
Fiscal 2024 Updated Guidance
General Mills continues to expect the largest factors impacting its performance in fiscal 2024 will be the economic health of consumers, the moderating rate of input cost inflation, and the increasing stability of the supply chain environment.
Guidance was disappointing for General Mills, updating the following:
Organic net sales are now expected between -1% to flat, compared to the previous range of 3% to 4% growth.
Adjusted EPS now expected to increase 4% to 5%, compared to the previous range of 4% to 6%.
These lowered guidance ranges reflect management’s expectation that volumes will not recover as expected. Luckily, the HMM cost savings program is now expected to provide savings of 5% of cost of goods sold, as compared to the previous 4% expected and the 3% savings in 2023. It is fair to say if General Mills did not have these cost savings programs in action, there would be serious concern over earnings quality moving forward.
My Takeaway
Revenues will be the story in 2024 for General Mills, as with the entire food & beverage sector. Can these companies, who saw tremendous pricing power as inflation rose, grow without inflation? The answer to this question is yes of course. General Mills was founded in 1928, and has seen just about every environment and survived through them all. The brands General Mills offers are extremely durable, and I can’t be too worried about revenue misses when margins are expanding, leading to bottom line earnings growth.
Forgetting the real numbers, shares of GIS are down over 22% in 2023, and down over 28% from it’s May high. I find it incredibly unlikely this poor performance happens again in 2024, but if earnings don’t come in better-than expected it could. I hold GIS, and added more on the earnings miss Wednesday. I wouldn’t be surprised if revenues beat expectations when they report Q3 2024 and the stock jumps higher. Until then, we wait and see.