Investors have modest expectations heading into General Mills' (NYSE:GIS) earnings report on March 24. While the breakfast and snack food specialist has seen surging demand throughout the pandemic, the impact is waning. And the stock's underperformance of the S&P 500 in the past year implies that Wall Street is betting on a quick return to near-flat annual sales growth.

But General Mills might sail past those low expectations with help from its bigger base of loyal customers and rising profitability. So let's look at how those attractive investment prospects might show up in the company's announcement for the third quarter of its fiscal 2021.

A young boy and girl eating cereal in a kitchen with a woman in the background

Image source: Getty Images.

Slowing growth again

There's every reason to expect a further slowing of sales growth following last year's spiking demand for pantry staples and home prepared meals. Organic revenue gains landed at 7% for the second quarter, which ended Nov. 29, compared to double-digit growth during peak COVID-19 lockdowns. Back in December, management predicted another quarter of gains ahead in fiscal Q3, but Wall Street is bracing for a slight slowdown to roughly 6%.

Within that headline sales number, keep an eye on the balance between rising prices and increasing volumes. General Mills' growth has been led by volume gains in recent quarters, and another win in that arena would suggest that the company is keeping many of its newest customers even as the restaurant industry rebounds. It would also mean the company is winning market share in core areas like yogurts, baking ingredients, and pet food through the Blue Buffalo franchise.

Gaining resources

The profit picture is clearer thanks to several factors that are all contributing to push margins toward new highs. General Mills' operating margin hit 20% of sales last quarter as manufacturing and input costs fell and prices increased. CEO Jeff Harmening and his team predicted another bounce ahead for the second half of fiscal 2021.

While that's good news for the short-term earnings outlook, the real payoff depends on management using all those extra resources to maximum effect. General Mills will be boosting marketing and innovation spending, for example, in a bid to maintain its recent market share wins from restaurants and fast-food providers.

The consumer staples company's cash stockpile might also allow it to make another major acquisition or boost direct returns to shareholders through dividends and stock repurchases. Look for updates on these capital projects on Wednesday.  

The soft landing

The fiscal fourth quarter, which just began, will mark the hardest year-over-year comparison General Mills has experienced in modern times. Sales will likely drop when compared to the 16% surge the company achieved through late May in 2020, when most of the world was in COVID-19 shutdowns.

The big question is whether the company's post-pandemic sales will grow at a quicker pace than the low single digits it was achieving before the disruption started last year. Management has suggested that demand will remain fundamentally higher for food prepared at home even after the virus threat fades and consumers return to normal mobility patterns.

This week's report won't completely answer that question. But General Mills' updated outlook might show whether management still stands by its aggressive growth targets for 2022 and beyond.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.