What happened
Shares of General Mills (GIS 1.69%), a food company known for iconic brands like Cheerios and Blue Buffalo pet food, rose roughly 5.5% in morning trading on Wednesday. The big story was the fiscal fourth-quarter 2022 earnings update, which was mixed in some ways. But investors clearly chose to see the positives this morning.
So what
General Mills reported an organic sales gain of 13% in the final quarter of fiscal 2022. That's a huge number, driven largely by price hikes. Overall sales rose 8% to $4.9 billion, slightly exceeding Wall Street expectations. On the bottom line, the consumer staples giant posted adjusted earnings of $1.12 per share, up 23% year over year and well ahead of the $1.01 consensus estimate.
Investors tend to like it when a company beats on both the top and bottom lines, and that certainly seems to be what Wall Street was focused on today.
The bad news that's being overlooked here is that the company's price hikes led to a volume decline of 9 percentage points. To be fair, a good portion of that was related to a foreign asset sale, but the only division with a volume gain was pet food, which benefited from an acquisition.
There are a lot of moving parts in there, but the key takeaway is that increasing prices are supporting sales but leading consumers to consider cheaper alternatives. That's to be expected, but also suggests that General Mills' pricing power might not hold up.
Now what
General Mills increased the dividend 6%, which is clearly nice to see. And it expects full-year fiscal 2023 organic sales to increase between 4% and 5%, which is pretty solid for a food company. However, because of inflationary pressures and "the economic health of consumers," management is expecting operating profit to be down as much as 2%, with a high-end target of a mere 1% advance.
That's not so great and hints that fiscal 2023 could be a more difficult year for the company as it looks to continue pushing more costs on to increasingly struggling consumers.
