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General Mills a little soggy today after EPS miss, but GIS continues to reshape its portfolio General Mills a little soggy today after EPS miss, but GIS continues to reshape its portfolio Briefing.com General Mills (GIS -4%) is a little soggy today after the company reported Q2 (Nov) earnings this morning. The consumer packaged goods giant, which owns brands such as Cheerios, Blue Buffalo, Annie's, Progresso soups, and Pillsbury, missed analyst expectations for EPS while posting slight revenue upside. GIS also tweaked its full year EPS guidance lower, although that adjustment may have been meant mostly to incorporate the Q2 miss rather than to guide down for the second half of the year. The stock's price has climbed slowly but steadily over the past couple of years. The company has been a beneficiary of the pandemic's impact on demand for food at home; lifestyle changes associated with the pandemic, including the rise of remote work, prompted increased at-home food preparation activity and boosted consumer appreciation for cooking and baking. In addition, an increase in the pet population helped its pet food segment. However, just as the pandemic gave GIS a boost, inflation and supply chain issues are taking a bite out of earnings. The EPS miss was mostly fueled by what the company describes as an "unprecedented combination of input cost inflation and supply chain disruptions." This led to margin compression in the quarter; adjusted gross margin fell 330 bp yr/yr to 32.2%, and adjusted operating margin dropped 200 bp to 16.3%. To compensate, GIS has been raising prices, but its measures were not enough to avoid the EPS miss. Its North America Retail segment struggled a bit; sales rose just 2% yr/yr to $2.98 bln. Meanwhile, its Pet segment was the star of the show with sales up 29% yr/yr to $593 mln; however, this was boosted by a pet treats acquisition that closed on July 6. Its Convenience Stores & Foodservice Segment saw revenue jump 23% to $541 mln, reflecting ongoing recovery in key away-from-home food channels like schools, restaurants, lodging, and convenience stores. Despite the EPS miss, GIS made it clear, encouragingly, that it expects ongoing elevated consumer demand for food at home relative to pre-pandemic levels. Besides earnings, General Mills also provided an update on its portfolio reshaping efforts. On November 24, the company announced plans to sell its European dough businesses to Crlia. Also, on November 30, the company completed the sale of its European Yoplait operations to Sodiaal. Through these sales plus its $1.2 bln purchase of Tyson Foods' (TSN) pet treats business, General Mills has made it clear it wants to focus on faster-growing and higher-margin segments. We like that pet treats acquisition, as it nicely complements GIS's Blue Buffalo line of pet food. Sales of pet food and treats tend to be durable even during difficult economic times.Bottom line, investors were disappointed in the EPS miss. What's interesting is that investors have been rotating out of tech stocks in recent weeks and into safe haven stocks like consumer packaged goods. GIS had gained as much as 12% since early December. We think the rotation into safer haven areas makes sense, and GIS's comments about the at-home eating shift remaining elevated are encouraging. However, it's not a panacea, as inflation and supply chain problems will remain issues. GIS is known to be a steady grower, and the company rewards investors with a healthy 3.1% dividend yield. In addition, many of GIS's products are resilient against economic downturns. We remain slightly concerned about rising inflation, but we think that the defensive nature of the company's products, its price increases, and its shift into higher growth/margin areas like pet food and treats should help it mitigate those concerns. |
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