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Friday, January 27, 2023


General Mills’ Sliding Sales Volumes Flash Latest Warning

As Bloomberg’s Felice Maranz points out this morning, another big consumer-facing company just reported a sharp decline in sales volumes, sending a warning signal for corporate bottom lines.

Sales volumes – which are one half of the revenue equation along with price – are sliding, as the inflation which has helped firms raise their prices is starting to cool. For now, price increases have propped up profits, even with shrinking volumes. But weakening pricing power ahead, along with accelerating declines in volume, spells trouble for equities.

Food manufacturer General Mills – which owns such asbrand as Pillsbury, Yoplait, Haagen-Dazs, Cheerios, Betty Croker and Blue Buffalo – is the worst S&P 500 performer ahead of the bell after reporting a greater-than-anticipated organic sales volume drop, even as adjusted EPS and net sales topped estimates. Total 2Q organic net sales volume fell 6% while prices rose 17% — resulting in 11% organic net sales growth.

As Maranz warns, that combination looks unsustainable, even if food inflation keeps outpacing other categories. (Food prices climbed “only” 0.5% in November.)

Last month, packaged-food peer Kellogg also reported contracting organic volume, while cleaning supplies firm Clorox sank after volumes (labeled the worst by far of the earnings season) tumbled. At the time, that raised questions about plans for further price hikes. Deteriorating volumes on higher pricing were in focus at Colgate-Palmolive and PepsiCo.

As Maranz concludes, watch for more signals about macro conditions as companies that reported surprisingly poor results last quarter are due to release results this week, including FedEx and Nike after the bell.

General Mills shares dropped as much as 5.4%, the most intraday since May 18 after analysts cited concern over continued volume declines reported in the packaged food company’s second-quarter earnings release. On the call, GIS said it plans to raise prices again in early calendar 2023.

Here is a snapshot of a couple of sellside reactions to the company’s disappointing results:

Bloomberg Intelligence

  • “Concerns about 1H volume declines for all segments except North American Foodservice may rise as it becomes harder to execute more price increases to sustain top- line growth,” analyst Jennifer Bartashus writes
  • In addition, the historically strong Pet category has been “lackluster on capacity and retailer inventory declines and needs to improve in 2H,” she says

Barclays (equal-weight, PT $80)

  • “A much weaker-than- expected Pet segment result held back what would otherwise have been much greater upside” in sales and margin, writes analyst Andrew Lazar
  • GIS’s flat y/y organic sales growth in Pet, due to continued capacity constraints and unexpected retailer inventory destocking, compared to his 10% growth estimate
  • Margin recovery appears “well underway,” with gross margin expanding more than expected, which Lazar views as a positive read across for the broader food group

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