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Earlier this morning, General Mills (GIS) reported blow-out 4Q20 results and posted its strongest top-line growth in many years.

Like other packaged food companies, including Kraft Heinz (KHC), Campbell Soup (CPB), and Kellogg (K), the company is experiencing a spike in demand as consumers cook and eat at home more during the pandemic.

• The strong results do not come as a surprise. GIS raised its Q4 and FY20 expectations on May 11, reflecting the well-known eat-at-home catalyst. Driven by strong growth in the company's North America Retail (~65% of revenue) and Pet (~10%) segments, the company said that it expected Q4 organic net sales to grow by double digits.
  • For the quarter, organic net sales jumped by 16%, which was entirely generated by volume growth.
  • EPS of $1.10 (+33% yr/yr) easily topped the $0.88 S&P Capital IQ consensus, while reported net sales increased by a robust 21% to $5.0 bln, edging out the $4.98 bln expectation.
  • In addition to the strong top-line performance, GIS' earnings growth was driven by an 80 bps improvement in adjusted gross margin to 36.1%. Cost reductions and manufacturing leverage emanating from the Holistic Margin Management program produced the margin expansion.
• About 85% of GIS' worldwide net sales are derived from the at-home food category.
  • This high proportion of total sales had the most profound effect on the North America Retail segment, which recorded impressive net sales growth of 36%.
• GIS' Pet segment achieved net sales growth of 37%, but the results aren't as strong as they first appear.
  • This is because the pet category benefitted from an extra month of results as the segment's calendar was aligned to the company's May fiscal year end.
• Since healthy results were anticipated, the primary focus lands on GIS' outlook. Despite the favorable business environment, the company chose not to provide guidance for FY21, which may be creating some disappointment this morning.
  • Forecasting financial performance accurately is made difficult by many virus-related variables. The big picture question is whether the spike in demand will be lasting once the health crisis passes and/or a vaccine becomes available.
  • Based on the rather muted performance in the stock, which is about flat year-to-date, it seems investors aren't convinced that GIS' will sustain its much-improved performance over the long run.

Key Takeaways: GIS reported very solid Q4 results, but a strong report was fully anticipated after the company telegraphed the rising demand in May. The eat-at-home trend is creating a potent tailwind for packaged foods makers such as GIS. Longer-term, the question is whether demand will remain elevated once consumers return to restaurants in larger numbers. Based on the mediocre performance of GIS' stock, it seems that investors remain skeptical that the company will sustain its improved growth rate.