General Mills fails to hold stock gains as earnings beat by a narrow margin as consumers remain cautious

By Tomi KilgoreCiara Linnane

Cheerios parent says it still believes in cereal

Shares of General Mills Inc. (GIS) surrendered early gains Wednesday, after the consumer-foods company posted slightly better-than-expected fiscal first-quarter earnings, but said the consumer is still wary in an uncertain economic climate.

"We delivered growth on the top and bottom lines in the first quarter amid an evolving external environment characterized by moderating inflation, stabilizing supply chains, and a resilient but increasingly cautious consumer," Chief Executive Jeff Harmening said in a statement.

The parent of brands including Cheerios, Nature Valley, Pillsbury -- as well as Blue Buffalo pet products -- said sales rose 4% thanks to another increase in prices, which helped offset a decline in volume. Sales were also boosted by a small rebuild of retailer inventory, which had hurt the top line last quarter.

On a call with analysts, Harmening said consumers are showing behavior more typical of a recessionary environment and moving to smaller sizes, cheaper restaurants and eating more at home.

"And now the cost of eating out is roughly four times what it is eating at home. And so as consumers get more squeezed, and as people get in there or more routines in the fall, we would think that at-home eating will probably pick up a little bit, we'll find out," he said according to a FactSet transcript.

Net income for the quarter to Aug. 27 fell to $673.5 million, or $1.14 a share, from $820.0 million, or $1.35 a share, in the year-ago period. Excluding nonrecurring items, adjusted earnings per share of $1.09 beat the FactSet consensus of $1.08.

Sales grew to $4.905 billion, above the FactSet consensus of $4.883 billion, as a six percentage-point increase in prices helped offset a 2 percentage-point decline in volume.

Sales at the company's pet foods segment were flat, after showing signs of recovery last quarter. The company is not expecting a major rebound this year, according to executives on the call, although it remains bullish on a category worth $44 billion.

"And we do think the prevailing trend over the long-term will be humanization which will drive growth, in particular, benefit premium brands like Blue Buffalo," said Chief Financial Officer Kofi Bruce.

One area General Mills said it is still confident about is cereal, at a time when surveys are suggesting that Americans no longer eat breakfast at the pace they did before the pandemic.

For more, read: Why have Americans abandoned their traditional breakfast--and what are they eating instead?

Cereal is still the leading item eaten in the morning and accounts for 19% of breakfast eating, Harmening said.

"So it's still a highly consumed item in the morning," he said. "We've been doing very well in cereal. As you know, we've grown more than 20% over the last five years. We've gained share, I think, five years in a row. We have the two biggest brands in the category in Cheerios and Cinnamon Toast Crunch."

The company has a 47% share of the cereal market and it's still growing every year, he added.

Industry insiders interviewed by John Oh, analyst atglobal research firm Third Bridge, said the earnings showed a still-fragile consumer.

"While pricing continues to offset the volume declines we've seen from General Mills, along with the broader industry, our experts have indicated that while for the most part consumers have been more resilient than previously thought, willingness to pay may be close to hitting a ceiling," Oh wrote in emailed comments.

For fiscal 2024, General Mills continues to expect adjusted EPS growth of 4% to 6%, while the current FactSet EPS consensus of $4.47 implies 4% growth.

The stock has tumbled 18.3% over the past three months through Tuesday, while the Consumer Staples Select Sector SPDR ETF (XLP) has slipped 3.0% and the S&P 500 has gained 1.3%.

-Tomi Kilgore -Ciara Linnane

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09-20-23 1135ET

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