GIS Earnings 'Better but Not Good Yet' as Macro Backdrop Plagues U.S. Consumers

SPEAKER_1 (0:00)

It's time now for the watchlist panel, and we're taking a close look at General Mills, the earnings, the Consumer Staple Secretary overall. Joining me right now for this conversation, Andrew Wang, Managing Partner, Running Mead Capital Management, and Kristoffer Inton, Senior Consumer Sector Analyst and Morningstar. I'm glad to see you both here. Kristoffer, we see General Mills down this week. Despite the earnings, there are some concerns and questions about growth and maybe some more work to do for this company.

What's the issue here that you think with General Mills, maybe why it's come under some pressure in the big picture? How is it positioned going forward?

Kristoffer Inton (0:37)

Sure. Look, this wasn't a bad quarter. General Mills beat on both the top and bottom line. Adjusted EPS is 75 cents versus 72 cents for consensus, and revenue was ahead too. But I don't think it's enough to calm the market's nerves, and here's why. Organic volume growth still isn't back. Sales are flat, not growing, and North American retail, which is the most important and largest segment, it's still down 3%.

And the consumer backdrop, if anything, looks like it might get worse before it gets better.

Inflation is tracking toward the high end of guidance, and freight costs are accelerating. And then we have this sort of big risk with diesel prices potentially staying higher for longer. So my read is this, the quarter bought management some time, but it just hasn't bought them proof. And so I still think the stock's undervalued, but I've trimmed my own fair value estimate because I think the road back to recovery is going to be longer than I've modeled.

SPEAKER_1 (1:39)

Yeah. And look, we have names in there like Betty Crocker, Bisquick, Cinnamon Toast Crunch, all of these popular names.

Betty Crocker, 105, Birthday. Andrew, what were some of your thoughts here? Is this a consumer staples problem or is this a General Mills problem?

Andrew Wang (1:56)

Yeah, I think that the good news here is that we're seeing signs of stabilization.

I would call this a better but not good yet earnings report. And the real question isn't whether General Mills can beat a low earnings bar. It's whether improving market share can turn into actual volume growth, especially as costs start moving higher. On the good side, food service and international both grew organic sales 4%.

Cat food grew double digits. One encouraging example is cereal. A year ago, share was down 9 tenths of a point. This quarter, it was down just 1 tenth. So I think there are green shoots. But the risk here is that costs are rising before volumes have recovered. So that's something that investors need to watch very closely.

SPEAKER_1 (2:42)

I mean, think about the evolution of what we've seen with this kind of company and now with GLP-1s and that's changing how people taste and buy and cereals and things like that. I think about that. I also think about the high oil prices. We mentioned some of the input costs here. Does General Mills have some sort of moat here, Christopher, at all? I mean, it was founded back in the 1800s, 1866

They must be doing something right.

Kristoffer Inton (3:11)

Yeah, I definitely think they have a narrow moat. They have very strong brands in many of the categories that they compete in.

They're number one or number two in most of those categories.

The issue here is not what General Mills is doing right or wrong, especially as we see them holding those shares. To me, it's a broader problem for the consumer staple sector. It's not just General Mills that's struggling to generate organic growth. It's a sector-wide problem that we see that everyone's trying to fix. Some folks are trying to cut prices, some folks are trying to rely on innovation, but really the strain consumer wallet, that's the problem here.

SPEAKER_1 (3:58)

Yeah, I think about that. As we talk about the shareholder value here, you did mention your numbers. I'd like to get those for everybody, Kristoffer Inton, can you tell me what those are, so I can write those down too for the folks? Do they have those?

Kristoffer Inton (4:12)

My fair value estimate is at $47, but we're about to lower it, probably amid the high single-digit percentage. Just because even though we saw stabilization in the quarter, we haven't seen the recovery and the uptick yet, and so the road to recovery, it's probably a couple of years at least.

SPEAKER_1 (4:33)

Well, Wang, and that new number may be closer to 40 or where?

Kristoffer Inton (4:38)

Closer, like 43

SPEAKER_1 (4:42)

I know you have to do the numbers, so 47 is the actual fair value right now.