General Mills, Inc. (GIS Quick QuoteGIS - Free Report) has been benefiting from its Accelerate strategy. Favorable net price realization has also been working well for the company amid cost inflation. However, a lower impact of inflation-justified pricing, along with consumers’ shift toward value products stemming from an uncertain economic landscape, acted as headwinds for GIS in the first quarter of fiscal 2024.

The company’s Pet segment was hurt by these factors in particular. That said, General Mills’ North America Foodservice and International businesses performed well. These segments form 25% of the company’s total worldwide net sales, and management expects these units to make positive contributions to its growth in fiscal 2024.

Let’s delve deeper into all the aspects of this Zacks Rank #3 (Hold) company.

Cost & Other Broader Headwinds

Although offset by the positive net price realization and mix, the adjusted gross margin was hurt by elevated input costs in the first quarter of fiscal 2024. General Mills also witnessed a rise in adjusted SG&A expenses, which included a double-digit spike in media investments.

For fiscal 2024, management expects input cost inflation of 5% of the total cost of goods sold, stemming from labor inflation. Moreover, labor inflation continues to impact the costs of sourcing, manufacturing and logistics. Additionally, continued brand investments may escalate SG&A expenses.

The company’s Pet segment retail sales in the first quarter of fiscal 2024 were somewhat affected by pet parents’ shift toward value products and channels, along with smaller pack sizes. Additionally, GIS is witnessing challenges in the wet food and treat categories, with pet parents spending more time at work or away from home. In the first quarter, segment sales remained flat year over year at $580 million as pricing was countered by soft pound volumes.

Management expects the difficult category dynamics to persist in the Pet segment throughout fiscal 2024 as it does not see any major change in the economic viewpoint for pet parents in the near term. However, management remains confident about the long-term prospects of Blue Buffalo. On its first-quarter earnings call, management stated that the biggest factors impacting its overall performance in fiscal 2024 are likely to be consumers’ economic status, the moderating rate of cost inflation and the rising stability of supply-chain status.

An increasingly cautious consumer landscape continues to impact General Mills in fiscal 2024. The company’s shares have declined 14.8% in the past three months compared with the industry’s drop of 14.2%.

Accelerate Strategy Works Well

General Mills has been focused on its Accelerate strategy (unveiled in February 2021), which aids it in making choices of how to win and where to play to boost profitability while enhancing shareholder returns in the long run. Under how to win, General Mills is focused on four pillars designed to provide a 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 to generate profitability through geographic as well as product prioritization, along with portfolio restructuring. This includes prioritizing investments, investing in five Global Platforms, driving growth in Local Gem brands and reshaping the portfolio. Management remains committed to undertaking productivity efforts and expects Holistic Margin Management cost savings of 4% of the cost of goods sold in fiscal 2024.

Additionally, the favorable net price realization bodes well. General Mills reported net sales of $4,904.7 million in the first quarter, which came above the Zacks Consensus Estimate of $4,865 million. The top line advanced 4% from the year-ago quarter’s figure. Organic net sales rose 4% due to the favorable organic net price realization and mix, partly countered by the reduced organic pound volume.

The Road Ahead

For fiscal 2024, organic net sales are anticipated to increase 3-4%, driven by robust marketing, innovation and in-store support. Also, gains from net price realization through the company’s Strategic Revenue Management initiative are likely to aid. The adjusted operating profit growth at cc is anticipated at 4-6%. Adjusted earnings per share (EPS) growth at cc is envisioned between 4% and 6%.

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