General Mills has conceded that its margin expansion is likely to come under pressure as cost inflation returns and the US food giant laps the strong margin improvements it booked at the end of last year.
The company today (24 March) booked a 13% increase in third-quarter earnings, which were boosted by improved margins and sales gains.
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Revenues increased 3% in the period, with currency exchange contributing 1% of growth. Pound volume matched year-ago levels, despite the company divesting roducts and a mix-shift that saw higher sales of lighter cereal products and lower sales of heavier soup and canned vegetable products.
The company also said that it improved its gross margin during the three-month period to 28 February, up from 36.1% last year to 38% of sales this year.
Speaking during a conference call with analysts, General Mills’ management said that gross margin gains reflected a favourable mix shift, supply chain productivity initiatives and lower commodity costs. The company has concentrated its efficiency drive on its “holistic margin management” (HMM) programme, which has looked to drive costs out of the business.
However, CEO and chairman Ken Powell did acknowledge that the company could be facing some margin headwinds in the remainder of this year and next year.
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By GlobalDataIn the year-to-date, General Mills’ margins have benefited from cost deflation, however, “as of next year” the company expects see “some return to higher input costs”, Powell said.
Powell revealed that these higher costs would likely be reflected in the group’s pricing actions, as it will looks to pass higher ingredients and production costs on to consumers.
Finance chief Don Mulligan added that margin gains will also be impacted by tough comparables in the fourth quarter and coming fiscal.
“We are rolling over a quarter where we had a 500 basis point margin expansion,” he said. “We had very strong HMM, a little bit of deflation that is helping… As the year has unfolded we have had less of a price benefit as we have now fully lapped any pricing.”
Nevertheless, Mulligan remained upbeat on General Mills’ margin growth.
“For the full year, we are not expecting inflation, we will continue to see the impact of HMM, year-to-date we are running at 400 plus basis points on margin expansion,” he said.
In a research note following the results release, Bernstein analysts Alexia Howard, Steven Wislo and Elizabeth Hunter concurred that the company would find the going tougher as it looks to continue to drive margin gains.
“General Mills is now lapping difficult margin comps and facing a difficult competitive environment in US Retail,” they wrote.
“Still, we expect that HMM productivity improvements should continue to help margins going forward,” Bernstein added.
While margin gains are likely to come under increasing pressure, General Mills insisted that it expected to continue driving earnings growth through top line gains.
Management revealed that the group has increased its investment in marketing and new product development. Benefits from these initiatives are expected to build momentum in the fourth quarter, the company said.
