‘Stressed consumer’ cutting General Mills outlook

MINNEAPOLIS — Top management of General Mills, Inc. voiced guarded optimism in September about prospects for a rebound in unit volume sales in the final months of 2023 following a period of weakness attributed to rising prices. In the company’s latest financial update, the optimism about sales growth had evaporated.

In lowering sales guidance for fiscal year 2024, General Mills chairman and chief executive officer Jeffrey L. Harmening conceded the company was experiencing “slower-than-expected volume recovery in the second quarter amid a continued challenging consumer landscape.” In addition to what Mr. Harmening referred to as the “still stressed” consumer, stepped-up competition in the ready-to-eat cereal business factored in weaker results and the lowered guidance for the company.

Responding to General Mills’ dimmer outlook for the year, its shares fell in early trading Dec. 20 on the New York Stock Exchange as much as $2.81, or 4.2%, from the Dec. 19 close of $66.71. At the morning trough, shares were trading not much above the stock’s 52-week low of $60.33 set in September.

Net income in the second quarter ended Nov. 26 was $595.5 million, equal to $1.03 per share on the common stock, down 2% from $605.9 million, or $1.01. Net sales were $5.14 billion, down 2% from $5.22 billion in the same period last year. Adjusted earnings per share in the first quarter rose 14% on a constant-currency basis.

Second-quarter results included $124 million in restructuring, impairment and other exit costs, versus $11 million in such charges the year before. Most of the fiscal 2024 charges related to a $117 million charge related to the company’s Latin America reporting unit.

In its guidance, General Mills is forecasting organic net sales to range between a decrease of 1% and flat from fiscal 2023, a four-percentage point cut from previous guidance of up 3% to 4%.  The change was attributed by the company to “slower volume recovery.”

Adjusted diluted earnings per share are forecast to increase 4% to 5%, versus its previous growth guidance of up 4% to 6%. General Mills said the lower sales growth will be “largely offset by higher HMM (holistic margin management) cost savings and greater elimination of disruption-related costs in the supply chain.”

The sales guidance represents a reversal from the outlook shared by Mr. Harmening in September. With consumers feeling pinched, they would likely be eating out less, he said at the time.

“We would think that at-home eating will probably pick up a little bit,” he said. He added, “We’ll find out.”

Commenting Dec. 20 on the shift in the outlook, Mr. Harmening said certain factors were falling in line with the company’s expectations, including a return toward historical price elasticities.

“(But), we’re seeing consumers continue to display stronger-than-anticipated value-seeking behaviors across our key markets, and this dynamic is delaying volume recovery in our categories,” he said.

General Mills also has felt pressure from competition “improving their on-shelf availability, an area where General Mills was already performing well,” Mr. Harmening said. The company has seen near-term market share pressure as a result.

On-shelf availability was the subject of considerable discussion between management and investment analysts in a Dec. 20 call, and Mr. Harmening said General Mills’ availability has continued to improve but not as fast as competitors.

He said General Mills had anticipated increases for competitors but not as quickly as it materialized.

“Our competitors have increased quite a bit and now have kind of drawn even with us after trailing for like four years,” he said. “…We anticipated it, but not the rate of change.”

In addition to highlighting steps General Mills is taking to cut costs and boost margins, Mr. Harmening cited steps the company was taking to build its brands in the currently challenging environment.

“For example, our brands are leaning into key consumer moments, like gathering with friends for game night tacos with Old El Paso and making family memories over the holidays with Pillsbury rolls, breads, and cookies,” he said. “We’re also partnering to provide value-added incentives to consumers, such as our Free Stories initiative on Motts Fruit Snacks, or Free Milk with participating purchases of Big G cereals. And as consumers continue to feel pressure, we’re reminding them of the convenience and value that we deliver every day, through products like Totino’s Pizza Rolls and Blue Buffalo Life Protection Formula pet food.”

He said the company continues to have success with new products, noting that four of the top five products launched in the US cereal category are Big G products.

“We plan to build on that success with our new Loaded Cereals platform,” he said. “These products feature a vanilla cream filling wrapped in a crunchy shell of our iconic brands like Cinnamon Toast Crunch, Trix, and Cocoa Puffs.”

In the yogurt category, Mr. Harmening said General Mills is introducing Yoplait Protein in January, a product with 15 grams of protein and only 3 grams of sugar.

“We are adding new flavors to successful product lines, like double chocolate chip Nature Valley Muffins, and new ‘Pistachio and Cream’ and ‘Chestnut Tart’ varieties of Häagen-Dazs pints,” he said.

Asked during the call about the new product pipeline, Mr. Harmening was upbeat.

“As I look across our big billion-dollar businesses, our innovation lineup is really good and frankly, better than it was last year,” he said.

The North America Retail segment of General Mills saw the slowest operating profit growth of any of the General Mills divisions in the second quarter (up 3% versus 17% to 94% for the other businesses). The division accounted for 79% of the company’s profits in the quarter and 64% of sales. Volume during the quarter was down 5%, partly offset by a 4% contribution from price/mix.

Operating profit of North America Retail in the quarter was $859.9 million, up from $837.1 million in the same period last year. Net sales were $3.31 billion, down 2%. In the first half of the fiscal year, operating profit was $1.66 billion, up 3%. Net sales were flat at $6.38 billion.

“Net sales performance outpaced Nielsen-measured retail sales growth in the quarter due to faster growth in non-measured channels,” the company said. “Net sales were down mid-single digits for the US Snacks and US Morning Foods operating units. Net sales were up low-single digits for US Meals & Baking Solutions and were up high-single digits for Canada.”

Asked about promotional activity during the quarter, Mr. Harmening said the environment has remained disciplined.

“The promotional environment has been a very rational promotional environment against some thoughts to the contrary,” he said. “We have seen the number of promotions pick up this year as we expected because of on-shelf availability.”

General Mills said its after-tax earnings from joint ventures, which includes Cereal Partners Worldwide, were $24 million, down 5% from the second quarter last year. Net sales were up 11% for CPW, “driven by favorable net price realization and mix, partially offset by lower pound volume,” the company said.

Year-to-date net income at General Mills was $1.27 billion, or $2.18 per share, down 11% from $1.43 billion, or $2.38, in the first half of fiscal 2023. Net sales were $10.04 billion, up 1%.