General Mills (GIS) expects the inflationary environment to significantly impact its FY2023 performance

Shares of General Mills Inc. (NYSE: GIS) were up 6% on Wednesday, after the company beat revenue and earnings expectations for its first quarter of 2023 and raised its full-year outlook. The stock has gained 18% year-to-date and 33% over the past 12 months. The company expects its performance during the fiscal year to be largely impacted by the inflationary cost environment and the economic health of consumers.

Quarterly performance

Net sales increased 4% to $4.7 billion in Q1 2023 compared to the same period a year ago. Adjusted EPS rose 13% year-over-year to $1.11. Both numbers beat market estimates. Operating profit rose 29% to $1.1 billion and operating margin improved by 440 basis points to 23%, driven mainly by net gains on divestitures.

Higher input costs took a toll on gross margin which fell 450 basis points to 30.7%. The quarterly results were also impacted by the recall on certain international Haagen-Dazs ice cream products. The company believes the major part of the recall impact has been captured in the first quarter and the second quarter will experience only a smaller part of the impact.

Trends

Organic net sales grew 10% during the quarter, driven by strong net price realization. The company continues to see high levels of inflation across its cost basket. The inflationary environment has led to more people preferring to eat at home, which is believed to be one of the reasons the company saw lower volume elasticities during the quarter than it had expected.

During the quarter, General Mills managed to hold or gain share in 56% of its priority businesses worldwide. The company grew its share in categories like global cereal, fruit snacks, and hot snacks. It is making significant investments to increase its manufacturing capacity for categories such as fruit snacks, hot snacks, cereal, and Mexican food in order to drive continued long-term growth.

Within its Pet business, General Mills continues to face capacity constraints that have hindered volume growth. The company is working on increasing the output of its current lines and adding additional capacity.

Outlook

Looking ahead, General Mills expects its performance during fiscal year 2023 to be impacted mainly by the economic health of consumers, the inflationary environment as well as the severity of supply chain disruptions. Although it expects volume elasticities to increase over the remaining quarters of FY2023, it expects them to stay below historical levels.

The company expects full-year volume elasticities to be lower than its initial plan and volume performance to be better. Input cost inflation is expected to be higher during the year, in the range of 14-15% of cost of goods sold.

Based on its first quarter performance, General Mills raised its sales and earnings outlook for fiscal year 2023. The company now expects organic net sales to increase 6-7% versus the previous outlook for growth of 4-5%. Constant currency adjusted EPS is now expected to increase 2-5% while it was previously estimated to be flat to up 3%.

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