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General Mills, Inc. (NYSE:GIS): A Defensive Powerhouse Poised for Sustainable Growth
Published on September 24, 2024 | Ticker: GIS

General Mills, Inc. (NYSE:GIS) is a leading American multinational company that has been producing and marketing branded processed consumer foods for over a century. General Mills' roots can be traced back to its founding near Saint Anthony Falls in Minneapolis, where it initially gained recognition as a major flour milling operation. Today, General Mills has evolved into a diversified consumer packaged goods (CPG) giant, with a portfolio of iconic brands that span across various food categories, including cereal, snacks, pet food, and more.

Financials

In the fiscal year ended May 2023, General Mills reported annual net income of $2,496.6 million on revenue of $19,857.2 million, reflecting General Mills' strong market position and resilient business model. General Mills' annual operating cash flow stood at $3,302.6 million, while its free cash flow reached $2,528.5 million, underscoring its ability to generate substantial cash flows to fund growth initiatives and return capital to shareholders.

During the third quarter of fiscal 2024, General Mills reported net sales of $5,099.2 million, a 1% decrease compared to the same period in the prior year. The company attributed this decline to lower volume contributions, which were not fully offset by improvements in net price realization and mix.

General Mills' operating profit for the quarter increased by 25% to $910.7 million, with the operating profit margin expanding by 370 basis points to 17.9%. This strong profitability was driven by favorable net price realization and mix, a decrease in certain compensation and benefits expenses, and a favorable change in the mark-to-market valuation of certain commodity positions and grain inventories, partially offset by higher input costs and a decrease in contributions from volume growth.

For the nine-month period ended February 25, 2024, General Mills reported net sales of $15,143.3 million, a 1% increase compared to the same period in the prior year. This growth was primarily driven by a 3% improvement in net price realization and mix, partially offset by a 3% decrease in volume contributions. Operating profit for the nine-month period increased by 1% to $2,652.5 million, with the operating profit margin expanding by 10 basis points to 17.5%.

Pet Segment Performance

One of the key highlights of General Mills' performance in recent quarters has been the strong growth in its Pet segment. In the third quarter of fiscal 2024, the Pet segment's net sales decreased by 3% to $624.5 million, while operating profit increased by 25% to $128.3 million. General Mills attributed this robust profitability to lower input costs and favorable net price realization and mix, partially offset by a decrease in contributions from volume growth and an increase in selling, general, and administrative (SG&A) expenses.

Outlook

Looking ahead, General Mills has provided guidance for fiscal 2025, which reflects General Mills' confidence in its ability to navigate the current economic environment and drive sustainable growth. General Mills expects its organic net sales to range between flat and a 1% increase, while its adjusted operating profit growth on a constant-currency basis is anticipated to be between a decline of 2% and flat. Additionally, General Mills expects its adjusted earnings per share (EPS) growth on a constant-currency basis to be between a decline of 1% and an increase of 1%.

Growth Strategy

One of the key drivers of General Mills' growth strategy is its focus on Holistic Margin Management (HMM), which aims to use productivity savings, mix management, and price realization to offset input cost inflation, protect margins, and generate funds to reinvest in sales-generating activities. General Mills has been successful in leveraging HMM to maintain strong profitability, with its adjusted operating profit margin expanding by 150 basis points to 18.5% in the nine-month period ended February 25, 2024.

In addition to its focus on HMM, General Mills is also investing heavily in brand-building efforts, new product innovation, and strategic revenue management (SRM) initiatives to drive volume growth and improve its competitive positioning. General Mills plans to increase its consumer spending by a meaningful amount in fiscal 2025, with a focus on enhancing brand communication, introducing new products with improved taste profiles, and optimizing its pricing and promotional strategies to provide greater value to consumers.

Geographic Diversification

General Mills' geographic diversification also contributes to its resilience. In the third quarter of fiscal 2024, General Mills' North America Retail segment, which accounts for the majority of its revenue, reported flat net sales compared to the prior-year period. The International segment, which includes markets outside of North America, saw a 3% decline in net sales, primarily due to challenges in Brazil and China. The Pet segment, which has been a key growth driver for General Mills, reported a 3% decrease in net sales, while the North America Foodservice segment recorded a 1% increase.

Liquidity

From a liquidity perspective, General Mills remains in a strong financial position. As of February 25, 2024, General Mills had $588.6 million in cash and cash equivalents and $11,827.3 million in long-term debt, with a net debt to EBITDA ratio of 2.9. General Mills' free cash flow conversion rate was 95% of adjusted after-tax earnings, demonstrating its ability to generate substantial cash flows to fund its growth initiatives and return capital to shareholders.

Risks and Challenges

One of the key risks facing General Mills is the ongoing volatility in the macroeconomic environment, including persistent inflation, rising interest rates, and potential changes in consumer spending patterns. General Mills has acknowledged these challenges and has taken proactive steps to enhance its competitiveness and value proposition to consumers. Additionally, General Mills faces competition from other leading CPG players, as well as the growing presence of private-label brands in certain categories.

Conclusion

Despite these challenges, General Mills' diversified portfolio of iconic brands, strong market positions, and focus on operational excellence position General Mills well for long-term growth. General Mills' commitment to innovation, brand-building, and strategic revenue management, coupled with its robust financial profile, make it an attractive investment opportunity for investors seeking exposure to the defensive and resilient consumer packaged goods sector.

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