General Mills

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

General Mills is a multinational manufacturer and marketer of branded consumer foods, operating in more than 100 countries and generating revenue from a diverse portfolio of iconic brands and product categories.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

General Mills, a global food giant, presents a mixed picture of strength and vulnerability. While it boasts a diverse portfolio of iconic brands with significant consumer recognition, it faces headwinds from a complex competitive landscape, volatile input costs, and a changing consumer environment. Let’s delve deeper into its business, financials, and overall prospects.

Business Overview

  • Revenue Distribution: General Mills operates across four reportable segments: North America Retail, International, North America Foodservice, and Pet. North America Retail, encompassing the US and Canada, contributes the majority of revenue. While other segments offer growth potential and geographic diversification, their results are often sensitive to FX fluctuations. The business is largely composed of well-known brands such as Cheerios, Yoplait, Häagen-Dazs, and Old El Paso, that span across various food categories. It is also very strong in pet foods with its Blue Buffalo brand.

  • Industry Trends: The packaged food industry faces several key trends. Consumers increasingly demand healthier options, including less processed and organic foods. Also, private-label brands have gained market share by offering cheaper alternatives to big name brands. Additionally, consumers are looking at greater convenience, which is why they are willing to pay for ready-to-eat and on-the-go food products. There is also an increasingly larger push for sustainability and transparency in the food supply chain. Finally, inflationary pressures often affect both raw material and input costs, as well as changing consumer behaviors. These present challenges to the traditional food companies as consumers have more options.

  • Margins: General Mills’ operating margins are affected by input costs, transportation costs, and promotional spending. They have typically been around 15% but fluctuated over the last few years due to supply chain disruptions, input cost pressures, and their actions on cost improvements.

  • Competitive Landscape: The food industry is highly competitive, with strong competition from other large established branded food companies. They face competition also from smaller, specialized brands and private label options. To remain competitive, companies such as General Mills need to continue innovating, maintain a strong brand image, and offer products at competitive price points.

  • What Makes General Mills Different: The power of iconic brands is a key differentiator for General Mills. They have strong customer loyalty, and they have an ability to stretch brands across multiple product categories. For example, they recently launched “Lucky Charms Cereal Bars” and other similar products. Also they continue to improve their operational efficiencies and supply chain agility. With their size, and scale, they can have strong pricing power when they see increased demand.

Financial Analysis

  • Revenues: In fiscal year 2023, General Mills reported sales of $19.6 billion. They also reported organic sales growth of 8%, driven by both price increases and volume growth, with strong growth in key areas like North America Foodservice. However, 2024 sales so far have been underwhelming, and their operating profit margins have been hurt by higher input costs, and they plan to cut costs and make improvements to improve efficiencies and performance.

  • Profitability: In fiscal year 2023, net earnings totaled $2.4 billion, but declined to $775M in the first six months of fiscal year 2024. This decrease was caused by higher input costs and supply chain issues. Operating margins have come down because of increased input costs, but management expects to turn it around in the near future.

  • Cash Flow: General Mills typically demonstrates strong operating cash flow. Free cash flow for FY 2023 was at 2,279 million, which was an increase compared to 2022. These can help the company fund internal improvements, acquisitions, and other potential business opportunities.

  • Balance Sheet: The company has a significant amount of debt on their books, $10.5 billion in long term debt and approximately $1.3 billion in current debt which will hamper their ability to perform in the face of economic hardship and other external influences. Moreover, their goodwill is at $7.0 billion, which is an area of risk.

    • Liquidity: General Mills has ample liquidity, with $715 million cash as of May 2024, and has the option to draw on credit facilities as needed for operations and funding. They have a large debt repayment for fiscal 2025 of $1.1 billion, but should be able to navigate it based on current cash flow and available facilities.
    • Debt Management: They have an aggressive debt management policy and routinely use free cash flow to repay debts to further reduce interest costs. Their current weighted average interest rates are approximately 6% with maturities ranging to 2043.

Key Insights from Latest Earnings Call General Mills has revised its full year forecast to reflect challenging consumer demand and a volatile economic environment. Despite this, Management remains confident in their brands and ability to improve operational efficiencies to maintain value creation. They are also taking action on strategic pricing and other improvements to bolster growth and margins in the face of these challenges.

Moat Analysis

  • Moat Rating: 3 / 5 General Mills possesses a narrow moat, primarily stemming from its portfolio of iconic brands. These brands benefit from significant customer loyalty and allow the company to command pricing power. The “economic moat” is not as strong as a tech-giant company, as food consumption trends are not static and food companies do not benefit from network effects. In this industry, brand names are not always the most important, as they may be easily substituted when cheaper or better products come into market. Also, most brands lose their appeal over time.

    Sources of the Moat:

    • Brand Recognition: General Mills’ brands are deeply embedded in the minds of consumers. Some of them have been around for many years, and are used daily by customers. That creates a brand loyalty and allows pricing power.
    • Distribution Channels: The company’s established distribution networks give it an advantage in reaching customers. They have a strong presence across a wide variety of retail and foodservice channels.
    • Economies of scale: General Mills’ immense size enables it to achieve certain economies of scale. This is particularly visible in manufacturing and supply chain management.
  • Legitimate Moat Risks:
    • Erosion of Brand Loyalty: Consumers’ shifting preferences, and health concerns could cause them to abandon old brands for newer alternatives.
    • Intense Competition: Other large food companies and the constant rise of private label brands present competitive pressures that could potentially erode their margins.
    • Input Cost Volatility: Rising prices in raw materials and supply chain challenges can significantly impact their ability to generate margins.
    • Changing Consumer Preferences: The company has to be able to continue to innovate and cater to changing trends and tastes. If they fail to adapt, and keep a pulse on the market they will lose value.
  • Business Resilience:
    • Diversified Product Portfolio: Having a diverse product portfolio helps them weather any demand changes or trends in specific industries.
    • Global Reach: Being in international markets helps the company to maintain growth and protect from adverse effects of specific domestic markets.
    • Established Brands: Their popular brands can help the company withstand unexpected challenges, and continue to have stable sales and free cash flow.

Understandability Rating

  • Understandability: 2 / 5 Although General Mills produces food that is generally simple and can be understood by most, the sheer complexity and scale of the operation, and the many factors involved in their financial performance make the company difficult for most investors to analyze, therefore I have chosen the understandability rating to be a 2/5. You have to have a fairly strong grasp of accounting and financial statements to be able to analyze this company and its business. Also, many of the metrics you’ll need will not be listed directly on their reports but will have to be calculated, which adds to the complexity and difficulty.

Balance Sheet Health Rating

  • Balance Sheet Health: 3 / 5 The balance sheet has some concerning aspects related to the debt, and goodwill, which makes the health score around 3. However, they have a long history of positive free cash flow, which indicates they are generally well-managed and capable to navigate external economic disruptions. They are a mature company, and therefore not expected to be growing at an enormous scale, therefore low or negative growth is more easily manageable for them than for new tech companies. The low debt, compared to the size of their company, and continuous efforts at reducing the debt add to their health score.

Final Thoughts General Mills is a company that has a great balance of strengths and weaknesses. Their stable brand portfolio and large scale gives them a decent edge in the market, but at the same time, they face increasing competition and difficulty in maintaining margins and innovating. They have significant strengths that have helped them to maintain great success, but should take action to reduce risks that could affect their profits. Management has taken note of recent changes, and is working on cost optimization, a focus on margin-enhancing areas, and using a strategic pricing approach to improve performance and increase long-term value for shareholders. If management succeeds, then they can become a great investment opportunity. If, however, they fail to change their course, they will be facing a bleak future.