Bfood giant randed general mills (NYSE: GIS) It saw its stock price drop more than 4% on December 21 when it reported a profit loss in its second quarter of fiscal year 2022 (the second quarter). While its stock has rebounded somewhat since then, the factors that led to its failed earnings — inflation, rising expenses, and its decision not to raise prices — all linger.
However, the company still has a lot to go by and is well worth considering as a long-term investment. Here are two important conclusions from the current situation.
Increased revenue and lost profits
To the dismay of Wall Street, General Mills saw its net profit fall 13% year over year to $597 million in the second quarter. The culprit: high expenses. The company saw a 400 basis point decline in gross profit margins and 350 basis point decline in operating margins. These declines would have been higher if General Mills had not raised their prices somewhat, but these increases were not enough to offset the increase in expenses. Meanwhile, revenue was up 6% compared to the second quarter of last year.
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The company is aware of the current challenges. As Chief Financial Officer Kofi Bruce said during his second-quarter earnings conference call, General Mills is seeing “an eight to tenfold increase in the amount of disruption in our supply chain” with similar disruptions expected through the end of the fiscal year (mid-year) . 2022). Ingredient cost inflation has been pegged at 8% to 9%.
Asked whether the company intends to raise prices to offset increased expenses, North American Retail Group President Jonathon Noddy replied that General Mills is “trying to take a long view from a pricing standpoint” while CEO Jeffrey Harming added that “in the long run, … the supply chain will become more efficient.” To this end, General Mills has taken steps to improve its internal supply chain. This includes developing strong production capabilities in Asia, which the company expects will help reduce its costs.
Can General Mills manage future disruptions?
In short, General Mills avoids full price increases because it seeks to remain competitive — and hopes that inflation problems will ease and supply chain improvements will bring costs down. But could the company hamper itself by refusing to raise prices, which would raise profits and restore investor confidence?
The answer depends in part on how long supply chain problems and inflation will last – analysts give wildly divergent forecasts. The Wall Street Journal It expects the Biden administration’s policies, including increasing the federal debt to 123% of GDP, to continue driving inflation for years.
On the other hand, the Fed believes that inflation could drop to 2.2% by the end of the third quarter of next year — and even lower in 2023. At his December 15 press conference, Fed Chairman Jerome Powell said, “What We continue to expect inflation to fall to levels closer to our long-term target of 2 percent by the end of next year.” These are more optimistic predictions and would be great for General Mills if correct.
In my opinion, General Mills is relatively well positioned to overcome both the supply chain and inflation hurdles. But if these problems persist, the company still has the option to raise prices, which would not make it significantly less competitive since its competitors will also have to respond to similar circumstances.
The two-year picture (comparing 2021 to pre-pandemic 2019) is more encouraging, showing that General Mills has grown both in net profit — a fact masked by current inflationary trends. So under the temporary storms of supply chain bottlenecks and the economy in the grip of inflation, a clear path to growth continues.
General Mills remains focused on future growth
Meanwhile, General Mills is not sitting idly by and dealing with its past successes. Instead, it appears to respond flexibly to changing conditions.
For example, it focuses on building the pet food category, which has seen consistently stronger demand. Its acquisition of the Nudges, True Chews and Top Chews pet brands from Tyson Foods Earlier this year, pet food revenue in the second quarter helped surge to $593 million, a 29% year-over-year increase. The acquisition accounted for about half of the gains, with solid organic growth providing the remainder. CEO Jeff Harming believes that General Mills has a “long path of robust and profitable growth going forward for our pet food business.”
Certainly, current trends support this. About 10 million additional pets are now owned in North America since the arrival of COVID-19, according to research by grain company Scoular. Not surprisingly, pet food sales are also up, up 6.9% in the 52 weeks ending November 27. That’s three times the increase in food sales overall, according to NielsenIQ (NYSE: NLSN) Research mentioned before The Wall Street Journal.
General Mills is also taking the lead in strengthening its presence around the world. About a third of its revenue is now international, thanks in part to strong growth in Asia and Latin America. Operating profit was also up in the convenience store and food service category, up 20% year-over-year during the quarter and 33% for six months as “big reopenings” continued.
While inflation and supply chain disruptions are causing some problems for the company’s bottom line, people — and their pets — still need to eat, and General Mills appears to be positioning itself to remain lean and competitive among food stocks. It’s worth thinking of as a delicious potential investment.
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Ryan Hunt has no position in any of the stocks mentioned. The Motley Fool does not have a position in any of the stocks mentioned. Motley Fool has a disclosure policy.
The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.