What happened
Shares of consumer staples company General Mills (GIS 0.85%) rose steadily throughout March, gaining 11.5%, according to data from S&P Global Market Intelligence. It wasn't an unusual performance, with some of the company's closest peers also seeing gains in the 10% space. That said, toward the end of the month, General Mills showed why investors have been so upbeat.
So what
Food makers like General Mills benefited from increased eating at home thanks to the economic closures and work-from-home trends that went along with the coronavirus pandemic. These trends boosted sales above what would normally have been expected. To put some numbers on that, the company's March 24 earnings release showed that fiscal third-quarter 2021 (which ended in February) organic sales were up 7% year over year, and adjusted earnings were up 6%. Both are strong numbers for a food maker.
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That's great news, and the first nine months of fiscal 2021 were even better. Organic sales were up 8% over that span, and adjusted earnings advanced an incredible 14%. So the past nine months or so have been pretty good to General Mills, and investors are reacting accordingly.
But that is the past, and investors always look to the future, noting that the fiscal third quarter wasn't as good as the full nine-month period. In fact, with just one quarter to go, General Mills is projecting that its organic sales growth will come in at just 3.5% in 2021. That hints that the final fiscal quarter of the year will see a material organic sales decline year over year. The company is starting to lap the sales gains witnessed during the early days of the pandemic, so this isn't shocking.
So why would investors be upbeat? Management actually expects the declines to be slower than initially projected by some industry watchers. Investors appear to like the idea that the pandemic benefit, while not what it was, could linger a while longer.
Now what
Sales and earnings numbers are likely to be difficult for consumer staples companies like General Mills as the pandemic impact wanes. However, it is important for investors to watch closely, because the big issue is how much business the company can retain after things get back to normal. At this point, it seems as if the retention is still going to be fairly solid in the near term, even though results will be weak, comparatively speaking. That's actually pretty good news.
