“We see substantial risk for US-centric meal-based companies like [General Mills],” Bernstein analyst Alexia Howard cautioned in note published yesterday after General Mills reported strong fourth quarter earnings and full year results.
Despite the company bringing in higher-than-expected revenues of $4.89b – 1.7% ahead of consensus – as well as adjusted gross margins of 33.8% and an adjusted EBIT of $896.3m that beat expectations, she expressed fear that escalating inflation, a potential slowdown in consumer spending and other “unexpected pressures” that could crop up over the year “could prevent the company from delivering on its current guidance over the course of FY23.”
As such, Bernstein rated the company as ‘underperform’ with a target price of $53.
General Mills executives during the company’s fourth quarter earnings call yesterday echoed many of these same fears about the economy, supply chain and consumer spending, but they remain optimistic that the company will effectively manage these challenges and deliver organic net sales growth of 4-5%, and adjusted operating profit between negative 2% and 1%, including a 3-point headwind from divestitures and acquisitions, and adjusted diluted EPS that is flat at worst or up as high as 3%.
‘We expect a significant step-up in input cost inflation this year’ from 8% to 14%
“It is becoming increasingly clear that the environment in fiscal ’23 will remain dynamic. We expect a significant step-up in input cost inflation this year, from 8% in fiscal ’22 to approximately 14% in fiscal ’23,” warned CEO Jeff Harmening.
He added the company is also planning for a “moderate reduction in the level of disruptions and supply chain challenges in fiscal ’23, but still expect them to remain significantly higher than historic levels.”
In addition, he cautioned, the pandemic will continue to impact consumers’ health and mobility, as will mounting economic challenges that will reduce consumer spending – all of which will impact their food choices.
Despite this “dynamic environment,” Harmening said General Mills is “confident we will continue to compete effectively, leveraging the brand building playbook that has contributed to our success in recent years.”
It will do this by stepping up media spend, innovating, continuing to manage costs, strategically investing to boost capacity, and strengthening its digital and technological capabilities, he explained.
‘We are investing behind exciting brand ideas’
In terms of media, General Mills will focus on communicating its brands’ missions and “superiority” in the competitive landscape, according to Harmening – a strategy that likely will gain importance as financially squeezed consumers look for value to justify purchases.
For example, he said, “we are investing behind exciting brand ideas, including a new campaign from Nature Valley that elevates our brand purpose of making nature’s energy accessible for all. We are supporting Haagen-Dazs with a compelling new global campaign highlighting the superiority and irresistibility of Haagen-Dazs Ice Cream.”
More than half of General Mills’ media spend will focus on digital and the remaining will go towards performance marketing, said Jon Nudi, group president of North American Retail at General Mills.
Focusing on digital allows the company to test, iterate and optimize ads quickly before scaling them to see a significant return.
“The days of shooting an ad and hoping it works for a year are over. We’re literally optimizing ads on a daily basis and that’s really good for our brands because it helps build them and helps you find the message and it builds more loyalty for us as well,” he said.
‘An exciting lineup of new products’
On the innovation front, Harmening said the company is launching “an exciting lineup of new products in the first half of fiscal ’23” across categories and brands.
For example, it will introduce a Cinnamon Toast Crunch Rolls cereal, Pillsbury mini pie crust in the US, Nature Valley Crunchy Dip bars in the US and in Europe and Asia new varieties of Haagen-Dazs.
To ensure that new and existing products are best positioned in store and online for success, Harmening added that General Mills is advancing its connected commerce capabilities “by optimizing digital shelf metrics to ensure we show up brilliantly online and by investing in first-party data to drive greater consumer insights and relevant consumer engagement.”
Preparing for the unexpected
While General Mills can’t plan for everything in such a volatile period, executives sought to reassure investment analysts yesterday by noting it is taking measures to manage costs and supplies.
“We are about 55% covered on our ingredients and packaging material requirements. As we start the year, that is a bit higher than average,” Harmening said. And while he acknowledges “that still leaves obviously some lack of coverage, especially in the back half of the year,” that uncertainty has been built into the guidance.