Cinnamon Toast Crunch debacle aside, it appears General Mills may have a lot more to worry about besides shrimp tails in its cereal, as its gross margins are showing signs of erosion in what appears to be an impending wave of cost inflation.
The maker of Nature Valley granola bars, Pillsbury dough, Cinnamon Toast Crunch and numerous other consumer packaged goods, reported its third quarter earnings for the period of December-February late last month. Revenue stood at $4.52 billion, marking an increase of 8% year-over-year, and exceeded the $4.45 billion projected by analysts. However, the third quarter also saw General Mills’ gross margin take a beating, as rising input costs surpassed the offset from improved product pricing.
Despite an increase in demand for consumer-packaged goods, General Mills’ shares traded lower following the earnings call, as investors diverted their attention to the impact of cost-push inflation on the company’s margins. The cereal maker’s adjusted gross margin fell by 90 basis points from year-ago levels, as increasing input costs stemming from rising logistic prices and incremental capacity prices were only partially offset by the increase in revenue.
Prior to the economic conditions brought forth by the pandemic, General Mills was able to outweigh the impact of cost-put inflation via higher operating leverage stemming from increased revenue. This time, however, the company has been forced to revise its inflation expectations upward for the coming quarters, forecasting fiscal 2021 inflation to rise just above 3%, followed by a further increase in 2022.
With respect to increasing input costs and rising global inflation levels, General Mills has indicated it will raise prices by a significant margin in the current fiscal quarter. Although management provided little detail about the impending price increases due to the sensitivity of the topic, it was noted that price hikes would likely occur across certain segments.
At the same time, General Mills anticipates the current demand for consumer-packaged goods— particularly those that are consumed at home— will remain elevated for the foreseeable future. Given the ongoing flexibility of work-from-home arrangements, many workers will likely not return to the office full-time anytime soon, suggesting the current scope of consumer behaviour will not return to its pre-pandemic state very quickly.
The lengthly shifts in consumer behaviour will have more profound impacts on certain segments of goods. Those categories such as breakfast foods and cereals, which are typically consumed at home, will be prone to heightened demand. Meanwhile, food segments such as energy bars, which are designed to be consumed on the go, will no longer benefit from the demand levels seen prior to the pandemic. These structural shifts in demand will play an important role in the overall severity of cost-push inflation levels and General Mills’ imminent price hikes.
Information for this briefing was found via General Mills. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
