During the company’s fiscal third quarter ending Feb. 28, General Mills reported strong net sales up 8% to $4.5b compared to the same time last year – beating out street estimates and helping it lift its gross margin 80 basis points to 34.4% of net sales. However, higher input costs dragged down the adjusted gross margin 90 basis points to 33% of net sales – a drop that was 116 basis points below investment analyst estimates for the period and a marked downturn from the 200 basis point increase during the second quarter.
Adjusted operating profit margins also fell to 15.8% of net sales in the quarter compared to 16.1% during the same period last year, causing the year-to-date margins to flatten to 17.7% compared to 17.2% during the first three quarters of fiscal 2020.
“Looking ahead, as we experience higher inflationary environment, our first line of defense will continue to be our strong holistic margin management cost savings program.
"In addition, we are taking actions now and in the coming months, leveraging our strategic revenue management toolkit to drive net price realization that will benefit fiscal ’22,” General Mills Chief Financial Officer Kofi Bruce told analysts during the company’s third quarter earnings call March 24.
Bernstein: 'It remains to be seen how much pricing retailers will accept now'
Analysts with Bernstein, however, are doubtful that the company will be able to offset higher costs fully with increased net pricing.
“We wonder whether the retail environment will be conducive to taking sufficient pricing to cover input cost pressures and operational deleveraging,” mused Bernstein analysts Alexia Howard and Elizabeth Kem in a same day note.
They explain: “Grain input costs began rising sharply in the fall of 2020, [and] the input and freight cost pressures have been visible for some time. It remains to be seen how much pricing retailers will accept now that they have lapped the onset of the pandemic and may start to compete more directly on pricing.”
The price hikes also will come at a time when many local governments are easing restrictions put in place at the start of the pandemic, which means competition from restaurants and food service could increase – making higher prices potentially less palatable to consumers.
This comes on top of already high pressure from competing CPG players that have been eroding General Mills market share in some key categories.
For example, the Bernstein analysts noted they are worried that “key categories including cereal have been losing share of overall food spending thus far during the pandemic, and … these categories may weaken further as the economy reopens, despite solid progress on share gains and shopper recruitment.”
'We’re competing effectively, and we’re winning'
General Mills CEO Jeff Harmening was more optimistic about the companies' ability to hold its own based on its performance so far and its recently announce “accelerate” strategy, which he explained “prioritizes profitable growth in eight core markets that make up the vast majority of our sales and profit” and “five global platforms where our differentiated advantages will drive differential growth in our portfolio.”
For example, he noted in the first three quarters, “we’ve held or grown share in six of our eight core markets,” including gaining more than a half point in cereal, more than a full point in Mexican food, and 30 basis points in snack bars and in ice cream.
“We’re competing effectively, and we’re winning,” he declared.
General Mills now has the capacity to execute bolt-on acquisitions to 'reshape portfolio'
General Mills plans to drive additional growth with increased media investments, which is up 12% in the third quarter on a year-to-year basis, including “strong support behind compelling campaigns on Cheerios, BLUE, Old El Paso and Haagen-Dazs that are helping drive growth and market share gains,” Harmening said.
Finally, he noted, the company is reducing its debt so that it will have “a full set of capital allocation tools at our disposal to drive shareholder value, including investment in our business, dividend growth, M&A and share buybacks.”
With regards to mergers & acquisitions, he noted General Mills now has the capacity to execute bolt-on acquisitions to “further reshape our portfolio and help us achieve our long-term organic sales growth target.”
Despite the plays that General Mills has set in motion, some analysts remain skeptical, including those at Bernstein which lowered the company’s status to “underperform.”