General Mills slides despite topping consensus estimates

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By Sam Boughedda

General Mills (NYSE:GIS) shares fell Tuesday, currently down more than 4% after it reported its fiscal second quarter results, topping analyst expectations.

The food producer posted earnings of $1.10 per share, $0.04 better than the analyst estimate of $1.06, while revenue for the quarter came in at $5.2 billion versus the consensus estimate of $5.18B.

The company's net sales increased 4% to $5.2B, including a 5-point headwind from net divestiture and acquisition activity and 1 point of unfavorable foreign currency exchange. Gross margin rose by 20 basis points to 32.7% of net sales, driven by favorable net price realization and mix, partially offset by higher input costs and unfavorable mark-to-market effects.

"We continued to execute well and delivered strong top and bottom-line growth in the second quarter," said General Mills Chairman and Chief Executive Officer Jeff Harmening. "Amid ongoing volatility in the operating environment, we remain focused on driving our Accelerate strategy by investing in brand building and innovation, strengthening our capabilities, and continuing to reshape our portfolio."

The company also increased its full-year outlook for organic net sales, adjusted operating profit, and adjusted diluted EPS growth.

General Mills sees organic net sales increasing 8 to 9% in fiscal 2023, compared to the previous expectation of 6 to 7% growth, while adjusted operating profit is now expected to increase 3-5% in constant currency, compared to the prior range of between flat and up 3%. In addition, adjusted diluted EPS is now expected to increase by 4- 6% in constant currency, compared to the previous range of up 2-5%.

Following the report, Goldman Sachs analysts maintained a Sell rating and a $71 price target on the stock. They stated that "on the back of the beat the company raised its full year guidance, now calling for EPS of $4.06-$4.13 vs. GS/Consensus of $4.16/$4.12. The beat this quarter was driven by its North American Retail and Foodservice businesses while Pet fell well short of expectations as organic sales flat lined with both volume (-11%) and price/mix (+11%) decelerating sharply on a two-year stack basis."

"Management attributed the shortfall to retail inventory destocking, but at the same time pointed to its own supply chain constraints as a driver of its market share challenges. All-in, we expect the stock to underperform on the day as we believe strength in its core food business was expected while weakness in its pet food business was unanticipated."

Elsewhere, Stifel analysts told investors in a note: "General Mills reported 2Q23 EPS of $1.10, up 12% (constant currency) and up 10% reported versus the prior year, which was in line with our estimate and $0.03 ahead of the consensus estimate. Organic sales were up 11% led by pricing (+17%) with a -6% volume decline (low elasticity)."

"The gross margin was up 100bps versus the prior year, but it was down 170bps sequentially due to an inventory reduction in Pet that weighed on volume. To that end, Pet sales were flat on a reported basis in the quarter (up HSD in-market) and this weighed on overall sales and profit growth for the quarter."