General Mills Displays Pricing Prowess While Pet Volumes Improve

We plan to raise our $75 fair value estimate for narrow-moat General Mills GIS by a low-single-digit percentage after incorporating strong third-quarter performance and a modest lift to our fiscal 2023 outlook. General Mills’ astute pricing power, which underpins its narrow moat, was on full display as organic net sales jumped 16% (price/mix up 16%, volumes flat), edging our 9% preprint estimate. Mix benefits, coupled with progress in cost-savings initiatives, eased the blow from a midteens rise in input costs, benefiting adjusted gross and operating margins by 240 and 80 basis points, respectively, to 33.8% and 15.7%.

We were pleased to see capacity gains aiding customer service levels (reaching 90% from the high-80% range last quarter), which, coupled with increases in retailer inventory, helped restore volume growth to General Mills’ pet segment (up 6% versus an 11% decline last quarter). To continue to capitalize on demand trends, management unleashed a double-digit lift in marketing spending in the third quarter, which is set to persist into the period ahead. Coupled with investments in innovation, we believe such tactical investments should help ensure General Mills continues to resonate with inflation-stricken consumers and defend against private-label penetration.

Recent results compelled management to lift its fiscal 2023 outlook beyond its Feb. 21 update despite lingering macroeconomic uncertainty. Calls for 10%-11% organic net sales growth (from 10%) and 8%-9% EPS growth (from 7%-8%) rest slightly ahead of our high-single-digit and mid-single-digit respective growth estimates. While we intend to edge up our figures to be within range, our long-term prognosis for the business is unchanged. We continue to be pleased by General Mills’ efforts to reshape its portfolio and grow margins, fueling our estimates for 2% average organic sales growth and 200 basis points of operating margin expansion through 2032.