Image Source: Mike Mozart
By Brian Nelson, CFA
Cereal maker General Mills (GIS) continues to flex its pricing power. The company’s third-quarter results for its fiscal 2023, released March 23, showed a company that is raising prices almost at will and driving tremendous adjusted operating profit expansion, while organic pound volume remains essentially flat. The company continues to optimize its revenue model as it forgoes volume expansion in favor of pricing growth, and we would expect further price increases across its product line-up for some time. With adjusted operating profit surging, price elasticities remain in its favor, much to the detriment of the cash-strapped consumer, which can only expect more food-at-home inflation. Shares of General Mills yield ~2.5% at the time of this writing.
Image Source: General Mills
During General Mills’ third quarter of fiscal 2023, the company drove net sales 13% higher, while on an organic basis, its sales leapt an impressive 16%, with almost all of the advance driven by organic net price increases and mix. This is General Mills we’re talking about here, driving incredible mid-to-high teens organic top-line growth–quite the sign of the times as food-at-home inflation continues to rear its ugly head. General Mills experienced higher input costs, but its adjusted gross margin still advanced 240 basis points in the quarter, to 33.8% of net sales. Adjusted diluted earnings per share of $0.97 in the third period of its fiscal year was 17% higher than last year’s quarter on a constant-currency basis thanks to strength in operating earnings but also due to a lower share count.
Looking ahead to all of its fiscal 2023, General Mills’ numbers continue to be impressive. Organic net sales are expected to increase 10%-11% for the fiscal year, up from previous guidance of 10%. Adjusted diluted earnings per share is now expected to come in higher than prior targets, with the measure expected in the range of 8%-9% on a constant-currency basis (it had been targeted to be up 7%-8%). General Mills’ free cash flow is expected to remain healthy during the fiscal year, with conversion of adjusted after-tax earnings of at least 90%. We expect a modest upward revision to our fair value estimate on account of the earnings report, but most importantly, we expect consumer goods companies to continue to raise prices (and for consumers to continue to face elevated food at home inflationary pressure) as elasticities for food companies remain decidedly positive.
General Mills’ 16-page Stock Report (pdf) >>
General Mills’ Dividend Report (pdf) >>
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