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General Mills (GIS) Poised on Key Priorities, Costs Inflated

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General Mills, Inc. (GIS - Free Report) has been focused on core priorities, which include competing efficiently, operating with efficacy to fuel investments in brands and capabilities as well as reducing leverage. Focus on the Accelerate strategy and saving initiatives is also working well for the company, which is battling cost inflation.

It expects at-home food demand to decrease on a year-over-year basis in most of the core markets in fiscal 2022, while the same is likely to be greater than pre-pandemic levels. At the same time, the company expects persistent recovery in the away-from-home food demand, though it is not likely to fully reach pre-pandemic levels in fiscal 2022.  As nearly 85% of General Mills’ net sales reflect at-home food occasions, the abovementioned factors indicate reduced year-over-year aggregate consumer demand across categories in fiscal 2022. Also, management expects cost inflation in
fiscal 2022.

All said, full-year organic net sales are expected to decrease 1-3% in fiscal 2022 due to soft consumer demand. Adjusted operating profit at constant currency (cc) is anticipated to fall 2-4% from $3.2 billion recorded in fiscal 2021. Adjusted earnings per share at cc are envisioned between flat and 2% down from $3.79 reported in fiscal 2021. That said, the abovementioned upsides are likely to keep the company going amid the hurdles. 

Core Priorities on Track

With regard to the competing efficiently priority, General Mills saw broad-based net sales improvement across its largest markets in fiscal 2021. Also, it witnessed an increased share in five of its global platforms. These also work in tandem with the Accelerate strategy. As part of the second priority, the company is on track with Holistic Margin Management (HMM) and Strategic Revenue Management (SRM) initiatives. Management has also been focused on investing in digital, e-commerce, and data and analytics, which appear to be promising areas. E-commerce sales jumped 45% in fiscal 2021 and formed 11% of the company’s global sales. Management stated that its brands hold higher market share online compared with brick-and-mortar stores. Finally, General Mills progressed well with reducing debt leverage ended fiscal 2021, with net debt to adjusted EBITDA ratio of 2.9 times.

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Accelerate Strategy Looks Promising

General Mills is focused on the Accelerate strategy (unveiled in February 2021), which aids the company in making choices of how to win and where to play, with an aim of boosting profitability while enhancing shareholder returns in the long run. Under how to win, General Mills is focused on four pillars that are designed to provide competitive advantage. These include brand building, undertaking innovations, unleashing scale and maintaining business strength. The where to play principle is outlined to enhance the company’s capabilities for generating profitability through geographic and product prioritization along with portfolio restructuring. This includes prioritizing investment, investing in five Global Platforms, driving growth in Local Gem brands and reshaping portfolio.

Can Cost Woes be Offset?

During the fourth quarter of fiscal 2021, adjusted gross margin contracted 160 basis points (bps) to 34.5% due to adverse manufacturing leverage. Adjusted operating profit margin contracted 140 bps to 16.3%. For fiscal 2021, adjusted gross margin fell 40 bps on account of input cost inflation, costs associated with supporting elevated capacity and escalated logistic costs. Management expects total input cost inflation to be 7% of the cost of goods sold in fiscal 2022 – including higher costs of logistics, raw materials and manufacturing costs. In fiscal 2022, the company expects to witness the highest level of input cost inflation over a decade. Apart from this, soft volumes, supply chain deleverage and constant growth-oriented investments are likely to weigh on adjusted operating profit. Management expects adjusted operating profit to decline year over year in the first half of fiscal 2022.

However, its solid cost-savings initiative is likely to offer some cushion against the headwinds. General Mills has been pursuing many initiatives focused on improving operational efficiency to generate cost savings. On its fourth-quarter earnings call, management said that it remains on track to counter inflationary woes with solid HMM cost savings, which are anticipated to be 4% of the cost of goods sold. Also, favorable net price realization stemming from the company’s SRM capacity is likely to aid it in countering cost woes. As part of the SRM, the company has already unveiled pricing actions in most parts of its portfolio. The company also expects respite from reduced administrative costs in fiscal 2022.

Shares of General Mills, carrying a Zacks Rank #3 (Hold) at present, have declined 8.6% in the past three months compared with the industry’s 8.9% decline. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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