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General Mills (GIS) Gains on Accelerate Strategy & Pet Unit Sales

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Focus on growth initiatives like the Accelerate strategy and key priorities, has been working favorably for General Mills, Inc. (GIS - Free Report) . The company’s solid Pet segment sales are a key driver. In addition, General Mills has been pursuing many initiatives to generate cost savings amid an inflationary environment.

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During its third-quarter fiscal 2022 earnings release, management raised the full-year guidance range, courtesy of year-to-date performance and solid top-and bottom-line growth projections in the fiscal fourth quarter. Management expects at-home food demand to stay above pre-pandemic levels as people spend more time working from home. For fiscal 2022, organic net sales are now anticipated to rise roughly 5%, suggesting a sequential improvement in organic net price realization and mix. The company had earlier expected the metric to grow 4-5%. Adjusted earnings per share (EPS) growth at constant currency is envisioned to be flat to up 2%, suggesting improvement from the earlier guidance of down 2% to up 1%.

Let’s delve deeper into the factors backing the company’s growth.

What’s Driving General Mills’ Growth?

General Mills is focused on its Accelerate strategy (unveiled in February 2021), which helps the company in making choices of how to win and where to play to boost profitability and enhance shareholder returns. Under how to win, General Mills is focused on four pillars that are designed to provide a competitive advantage. These include brand building, undertaking innovations, unleashing scale and maintaining business strength. Where to play principle is outlined to enhance the company’s capabilities to generate 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 the portfolio. General Mills is focused on reshaping the portfolio to accelerate growth. Recently, the company signed a definitive agreement to acquire TNT Crust — a manufacturer of high-quality frozen pizza crusts for regional and national pizza chains, foodservice distributors and retail outlets.

General Mills is on track with its three key priorities for fiscal 2022, which go in line with the Accelerate strategy. The company plans to continue competing effectively – which includes prioritizing core markets, local gem brands and global platforms alongside utilizing its innovation and brand-building capacities. Next, the company is focused on undertaking cost control moves, including Holistic Margin Management (HMM) productivity program, Strategic Revenue Management (SRM) pricing initiatives and endeavors to counter input cost inflation and other cost woes. Thirdly, management is focused on actions related to reshaping the portfolio and the organization. In its fiscal third-quarter earnings call, management highlighted that it competed effectively, maintaining or growing market share in 66% of priority businesses year to date. The company also streamlined and realigned its operating structure in the quarter.

Solid Pet segment sales are a key growth driver for General Mills. During the third quarter of fiscal 2022, revenues in the Pet Segment came in at $567.7 million, up 30% year over year on the back of solid volume growth and positive net price realization as well as mix. Net sales included 14 points of gains from the pet treats business buyout (concluded on Jul 6, 2021). Organic sales increased 16% year over year. Management highlighted that a higher pet population and more humanization and premiumization of pet food amid the pandemic are tailwinds for the company’s pet food category.

Cost Hurdles on the Way

During third-quarter fiscal 2022, General Mills’ adjusted gross margin contracted 160 basis points (bps) to 31.4% due to input cost inflation, supply chain deleverage and escalated other costs of goods sold. Adjusted operating profit margin contracted 90 bps to 14.9%. The company is bearing the brunt of a volatile environment. It is battling transportation challenges and labor shortages. For fiscal 2022, management expects input cost inflation of 8-9% and major costs associated with supply chain disruptions.

Management is on track to counter inflationary woes with its solid HMM cost savings. The company has undertaken several broad-based SRM measures across its portfolio to tackle inflation and costs associated with supply chain disruptions. The company implemented several pricing actions in the portfolio using the four SRM levers — list pricing, promotion optimization, pack price architecture and mix management.

The Zacks Rank #3 (Hold) stock has gained 10.1% in the past six months compared with the industry’s 1.4% growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy)  stocks here.

3 Solid Food Stocks

Some better-ranked stocks are Pilgrim’s Pride (PPC - Free Report) , Sysco Corporation (SYY - Free Report) and Medifast (MED - Free Report) .

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen and value-added chicken and pork products, sports a Zacks Rank #1. PPC has a trailing four-quarter earnings surprise of 31.4%, on average.

The Zacks Consensus Estimate for Pilgrim’s Pride’s current financial year EPS suggests growth of almost 43% from the year-ago reported number.

Sysco, which engages in the marketing and distributing various food and related products, carries a Zacks Rank #2 (Buy). SYY has a trailing four-quarter earnings surprise of 9.1%, on average.

The Zacks Consensus Estimate for Sysco’s current financial year sales and EPS suggests growth of 32.6% and 124.3%, respectively, from the year-ago reported number.

Medifast, which manufactures and distributes weight loss, weight management, healthy living products and other consumable health and nutritional products, currently carries a Zacks Rank #2. MED has a trailing four-quarter earnings surprise of 12.9%, on average.

The Zacks Consensus Estimate for Medifast’s current financial year sales and EPS suggests growth of almost 19% and 11.5%, respectively, from the year-ago reported figure.