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General Mills Inc
NYSE:GIS

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General Mills Inc
NYSE:GIS
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Price: 63.99 USD -1.2%
Updated: Mar 1, 2024

Earnings Call Analysis

Q2-2024 Analysis
General Mills Inc

Company Navigating Mixed Economic Signals

The company's recent earnings call detailed efforts to tackle current economic challenges. Revenue is guided to hit at least the lower end of expectations, following Q2 performance. Cumulative savings in Cost of Goods Sold (COGS) through the company's efficiency program (HMM) have exceeded historical levels, reflecting supply chain improvements. Despite supply chain stability and successfully outperforming competitors in on-shelf availability, the company recognized the need for continued support in brand building and innovation to sustain market share growth. With the expectation of inflation persisting, particularly in low single digits, strategic decisions are being made to generate long-term shareholder value and maintain strong brands.

Innovation and Promotional Strategies Fueling Confidence

The company is heading into the next half of the year with robust innovation across its billion-dollar businesses, particularly in cereal, yogurt, soup, Old El Paso, and Haagen-Dazs. Notably, the quality of merchandising has improved, providing better returns on marketing investments despite an increase in the frequency of promotions. This uptick in promotional activities is still below pre-pandemic levels in both frequency and depth, suggesting a controlled approach to driving sales without compromising margins. The effective merchandising and the stable promotional environment are expected to contribute positively to future revenue growth.

Strategic Share Repurchasing with M&A Flexibility

The company has repurchased more shares than anticipated earlier in the year, signaling strong financial discipline and commitment to shareholder value. This approach also reinforces the company's solid net debt-to-EBITDA levels, which provides them with the flexibility for strategic acquisitions if opportunities arise that align with business goals. In summary, the increased share repurchasing reflects the company's confidence in its financial strategy and ability to balance returning capital to shareholders while remaining open to growth through mergers and acquisitions.

Comprehensive Cost Management Softens Revenue Impact

Despite an $800 million reduction in sales expectations at the midpoint, the company has restrained its earnings before interest and taxes (EBIT) growth guidance revision to a minor extent. The company attributes this to Holistic Margin Management (HMM) savings, which are on track to achieve 5%, surpassing prior expectations of 4%. Additionally, relatively stable inflation and supply chain cost reductions have helped offset revenue pressures. Furthermore, adjustments to incentive compensation based on revised projections have led to almost $100 million in reduced administrative expenses, bolstering the company's ability to maintain profitability guidance within the expected range.

Prospects for Gross Margin Expansion amidst Volume Deleverage

The company's gross margins have recovered to pre-pandemic levels, thanks in part to HMM contributions, but it is also focused on mitigating supply chain disruption costs. Moving forward, gross margin expansion is likely to normalize around historic levels of 4%, assuming the supply chain environment remains favorable. This suggests that while the company anticipates some level of future gross margin improvement, it remains cautious about potential volume deleverage and its impact on profitability.

Stable Share Performance Anticipated Post Distribution Rebuild

As the company begins to compete on an even footing with competitors' shelf availability, share performance is expected to improve. By maintaining strong brand support, enhancing product innovation, and ensuring effective in-store execution, the company is poised for continued share growth in 60% of its North American Retail categories. Additionally, while dollar market share has been a challenge, the company reports growth in pound share across 40% of its categories, thanks to its agile response to inflationary pressures.

Inflation and Consumer Behavior Influencing Category Growth

The company's executives acknowledge ongoing inflation as a factor influencing strategic price and promotional considerations. The expected category growth rate benefits from a lapping of Snap emergency allotments and previous pricing activities. While consumer economic pressures remain a variable, the company is observing improved but still adjusting consumer behaviors in the midst of a new economic reality. In terms of promotions, the quality and return on investment have improved year over year, suggesting that the company is navigating the current economic environment effectively in its marketing strategies.

Steadfast Approach to Pricing Amidst Industry Inflation

Despite inflationary headwinds, the company remains committed to pricing strategies that support long-term shareholder value creation and meet consumer needs. The leadership highlights an inflationary environment, particularly within the low single digits, guiding future pricing decisions. The strategic approach appears to be balanced, with a focus on maintaining brand strength and market availability rather than aggressive promotional activity, even as they continue to manage competitive shelf availability and consumer price sensitivities.

Earnings Call Transcript

Earnings Call Transcript
2024-Q2

from 0
Operator

Greetings, and welcome to the General Mills Second Quarter F24 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, December 20, 2023. I would now like to turn the conference over to Jeff Siemon, Vice President for Investor Relations and Treasurer. Please go ahead.

J
Jeff Siemon
executive

Thank you, Dina, and good morning to everyone. Thank you for joining us this morning for our Q&A session on our second quarter fiscal 2024 results. I hope everyone had time to review our press release, listen to the prepared remarks and view our presentation materials, which were made available this morning on our Investor Relations website.

Please note that in our Q&A session this morning, we may make forward-looking statements that are based on our current views and assumptions. Please refer to this morning's press release for factors that could impact forward-looking statements and for reconciliations of non-GAAP information, which may be [ discussed ] on today's call.

I'm here with Jeff Harmening, our Chairman and CEO; and Kofi Bruce, our CFO. So let's go ahead and get to the first question. Dina, can you please get us started?

Operator

[Operator Instructions] Our first question is coming from the line of David Palmer with Evercore ISI.

D
David Palmer
analyst

Question on North America retail margins. They've been impressive in spite of the volume declines we've been seeing. Do you think that the segment margin can hold near these levels, given what's going on with volume trends? And I guess what -- a couple of factors I'm thinking about is some of your high-margin categories like dough might be a negative mix effect but then again you're talking about accelerating productivity gains. So curious about the margins for that segment.

K
Kofi Bruce
executive

Yes. David, thanks for the question. Just to rewind a bit, we've seen the margin improvement, to your point, largely on the backs of really strong HMM delivery. So one of the features of this environment has been sort of the stabilization of the supply chain environment, which has allowed us to step up HMM more acutely on this business than our other segments and also to get at some of those disruption-related costs. We've made really strong margin progression gains on this business on the [indiscernible] to having already gotten at a good chunk of those disruption-related costs. So on balance, I see this business poised for more stability in aggregate.

D
David Palmer
analyst

And then with regard to the pet business, maybe is there a [indiscernible] will be from here Wilderness, for example, has been relatively weak. But what do you think the best earliest fixes will be for that business? And what are some of the long-term things you're looking to do to improve the trajectory.

J
Jeffrey Harmening
executive

Yes. Thanks, David. This is Jeff. I would say that in the presentation, we shared 4 things we're working on. And a couple of things we know that we can improve upon to improve the profile -- because it shows the Blue brand is still strong. And so as we look at Life Protection Formula, we've changed our advertising on that. The business has responded nicely, and we've seen steady improvements there. We have changed the merchandising on our Treats business. And while it's [indiscernible], we've seen significant improvement throughout the second quarter on that business and yet the results are still not what we want to be. And so that leads to what needs to come next.

And I think there are really a couple of businesses that -- and our [indiscernible] food. And so you'll see us introduce some value in variety packs in the back half of the year starting in January. And that we'd like to see improvements in that. And then the biggest fixes which will take a little bit longer -- and they're kind of inter length, but they're not the same. One is Wilderness. And we really need to reposition the Wilderness brand and do some work on that. And that will take a little while to get back to full health.

The other is that we haven't -- the pet specialty channel in itself has not done particularly well. We've overindexed in that channel. And there are some things we can probably do to perform better in that channel even while we keep investing to grow our food, drug and mass channel, which we're quite pleased with the results and online with the results.

The other thing, I guess, I would add is we did have -- as I look at the back half of the year, the reason we're not saying recovery or stabilization is that in the back half, we had shipments ahead of sales last year. And so we're lapping. That's particularly true in the third quarter. And so even to the extent we see some stabilization in the sales trends in Pet, the reported net sales are going to lag that because of some inventory build in the back half of the year. So those are the things that we need to do. Some of them are underway, and we like what we see so far. And there are a couple more that we really need to work on and will take a little bit longer.

Operator

Our next question is coming from the line of Andrew Lazar with Barclays.

A
Andrew Lazar
analyst

Jeff, I wanted to maybe chat a bit about -- I realize, as you've talked about in the prepared remarks, the company has some EPS flexibility despite the weaker sales in the form of lower sort of compensation expense versus last year, the HMM that's been stepped up, some more share repurchase versus your sort of initial expectations. So I guess my question is, is '24 a year where maybe the company perhaps should lean in even more and maybe be a little less concerned about sort of a specific EPS range, if you will, in order to set it up -- set the company up for more sustainable sort of growth in '25 and beyond. That's a question I'm sort of getting a lot this morning. So I just wanted to get your thoughts on that, if I could.

J
Jeffrey Harmening
executive

Yes, Andrew, I'm glad you asked, and I appreciate the fact you're getting a lot. I think it's a really important question because our job is to maximize long-term shareholder return, not any particular quarter or frankly, even in any particular year. And so one of the things that we -- as we look back over time, when the consumer is stressed and the results are harder to come by, one of the things we've seen successful companies like ours do is reinvest for the future. And that comes in the form of consumer investment, but also investment in capabilities, things like strategic revenue management and performance marketing and automating supply chains and things like that.

And so [ incumbent ] -- included in our results is an increase in consumer spending, even though we've guided down on our sales for the year, we'll still invest in consumer spending. And we're still investing in all the capabilities that we know will drive our growth, not only for this year but in years to come. And then that's with regard to growing revenues, but also maintaining our discipline on HMM and automation and using AI and our supply chains are going to be important parts of that as well. So one of the things that I want to make sure you can tell your investors is that while our profit guidance is still 4% to 5% growth on EPS, that's inclusive of making sure we maintain our reinvestment in the business. And we're able to do that because our HMM levels are very high right now. We're taking out the cost from our supply chain. And as you mentioned, our admin costs are declining.

A
Andrew Lazar
analyst

Great. And then just on -- a bit more on the faster competitor normalization of shelf availability comments that you made in the prepared remarks. Is it an issue in a specific category? Or is it more broad-based? And is it General Mills actually losing shelf space or really just others now having better availability in the slots that they have? And what have you seen that mean for promotional intensity or not?

J
Jeffrey Harmening
executive

Andrew, I want to try to address all those questions. And if I miss one, come back because I didn't mean to skip. On the on-shelf availability, when we put our guidance together for this year, I mean, we grew at 10% last year and our original guidance was 3% to 4% this year. And so we knew that on-shelf ability would be a headwind for us because, frankly, our supply chain held up a lot better than our competition did a year ago. And so we calculate -- we factored that into our guidance for this year. But the fact of the matter is on-shelf availability for our competition increased a lot faster, particularly private label and small players, faster than we had anticipated.

Importantly, they're now catching up to our on-shelf availability. And so we've actually improved our on-shelf availability this year. So it's not as if we have gone backwards. We are -- our on-shelf availability is higher now. And you can see that out because we have reduced our disruption costs. It's just that our competitors have increased quite a bit and now have kind of drawn even with us after trailing for like 4 years. So that's the first part of the question. We anticipated it, but not the rate of change.

In terms of the -- and we'll lap -- we'll start lapping that really in kind of late April and May of this year. So that's when we started to see this impact.

In terms of distribution, one of the things -- our teams across the board, certainly in North America retail are really executing well. Our share of distribution is actually up. And so there's not a problem with our distribution. In fact, the opposite. Our distribution looks good. And I will say that I'm really excited about our innovation in the back half of this year, which I'm hoping will bolster that further. We've got good innovation in cereal. We've got good innovation in yogurt, in soup, in [ Old El Paso ] and Haagen-Dazs. And so as I look across our big billion-dollar businesses, our innovation lineup is really good and frankly, better than it was last year. And so as we look to the next half of the year, I think we can see our distribution continuing to build.

As what it means to promotional -- the promotional environment, has been a very rational promotional environment against some thoughts to the contrary. We have seen the number of promotions pick up this year as we expected because of on-shelf availability. Importantly, we've also seen the quality of the merchandising, specifically the quality of merchandising that we get has also accelerated. And because the quality of merchandising has improved for us, we've seen the list we received, but also the ROIs we receive have been better than they were a year ago.

But importantly, and this is a really important point, even though the level of merchandising has increased in frequency, it has not increased in depth. And even the frequency is still below where it was before the pandemic and the depth of the promotion is well below. So yes, we're seeing increased levels of promotion. We expected that. And frankly, the returns are better because of the quality of merchandising that we're seeing.

Operator

Our next question is coming from the line of Ken Goldman with JPMorgan.

K
Kenneth Goldman
analyst

When you visited New York a couple of months ago, you mentioned that your -- you may lean in a little bit harder to share repo. So I don't think today's announcement on that line item was a huge surprise. But I guess I'm curious, you've also spoken about your ongoing desire to be flexible for potential strategic acquisitions. And I'm just wondering, is there any read-through from your willingness to purchase more shares than you initially expected into how you kind of see the ripeness of M&A opportunities, I guess, in today's market?

J
Jeffrey Harmening
executive

Yes, Ken. This is Jeff. Let me start with that question. And Kofi, if you want to add any color commentary, that would probably be helpful too. But know the fact that we repurchased more shares in the quarter than originally anticipated at the beginning of the year is not a reflection of a change on how we view capital allocation. We're investing quite a bit in the business and then increasing our dividend. And then if we see M&A, we'll certainly do more -- importantly, our net debt-to-EBITDA levels are in a good place. And so to the extent that we see something that we think can create shareholder value in terms of portfolio reshaping, we're more than capable of doing that. So what you've seen is really a reflection of our executing against the capital allocation priorities we already stated.

K
Kofi Bruce
executive

I think, Ken, the only other thing I'd add is just to state one of the obvious sort of underlying points, we're getting additional leverage out of our repurchase activity. So dollars are going further because of the pressure, obviously, on the stock as much as the stock has come down since the beginning of our fiscal year. So that's also amplifying the impact in terms of the diluted share count and the acceleration into the front half of the year.

But I think I'd reiterate Jeff's point, we expect to have more than ample flexibility for M&A should we see the right project or set of projects. None of the things we're doing on share [ reproaches ], we would expect to take our leverage above 3x net debt to EBITDA.

K
Kenneth Goldman
analyst

And then changing subjects, one of the more appealing elements of pet food as a category has been the high level of switching costs, especially in premium where there's less price sensitivity, too. Just curious, though, given some of the challenges facing Blue, is it fair to wonder if maybe the cost to switch isn't quite as high as we all thought and that premium isn't quite as protected? Or do you think maybe, hey, we're just in a unique time when the specialty channel is kind of lagging at the same exact time that the consumer suddenly worse off?

J
Jeffrey Harmening
executive

Yes, Ken, that's a fair question. I think there are 2 things at play here, and one of you pointed out, but I'll start with another area. As we look at the pet food business, the feeding business, and certainly, that was the majority of the business we bought when we bought Blue Buffalo was feeding, is relatively inelastic. And when we see that with our dry pet food, both cat and dog food performance, the -- but treating and we bought into that when we bought the pet food business from [ Tyson ] a couple of years later, that is actually more elastic and is more of an [ end-plus ] purchase. And that's why when you see the economy as it is, people trading down to less expensive treats if they're still treating and treating a little bit out of treats because they're trying to economize on that, but they stick with the feeding.

And so the first part of the question -- the first part is that the feeding part is actually not more inelastic than we had thought. The -- but treating is more elastic. The second piece is it's a combination, you say -- I mean, I don't remember the last time when you see 30% increase in costs over 3 years. And while it's relatively inelastic, it's not completely inelastic. And so the combination of the tremendous increase in input costs, combined with the pet specialty channel where we over index, that is -- there's no question that those 2 things have had and impact on our business in the short term.

But importantly, as we look over the 5 years we've owned the business, we've doubled the business. The Blue brand is really strong when we execute well against it, whether it's on Life Protection Formula advertising or holiday treats or things like that. We see the business really respond well. And it's very clear to us this [ humanization ] trend is going to continue and the Blue is well placed to capture that over the course of time.

Operator

Our next question is coming from the line of Nik Modi with RBC Capital Markets.

N
Nik Modi
analyst

On the promotional, I want to follow up on the promotional comment. One thing we're hearing from retailers is the lift doesn't seem to be as good as we've seen historically, Jeff. So I just -- I was hoping you can just comment on that? And is that something you're seeing in the marketplace? And does that kind of maybe be -- send a signal that perhaps absolute price points have become too high? I would just love your comments on that.

J
Jeffrey Harmening
executive

When we talk about historical, it kind of depends, Nik, on what we mean by historical. I don't mean to be [ cute ] with this. But if we look relative to where we were a year ago, what we see is our lifts have actually improved vis-a-vis where they were a year ago. If we look to see where the lifts are versus where they were 4 years ago, they're not quite at the levels of where they were 4 years ago. And I don't have a fact that I can point to as why exactly that is the case. But I would tell you that neither we nor consumers have seen inflation the way we've seen it over the last few years, and consumers are still getting used to new prices in the marketplace. And I suspect whether that's food or gas or rent or any number of things, that is absolutely the case. And it will take a little while for consumers to settle into what new price points are to the extent we continue to see inflation, which we do, even if at a more modest level.

So Nik, I would say that relative to a year ago, we're pleased with the progress of our lifts but relative to historic pre-pandemic, they're a little bit lower, and I would surmise that it's the consumer catching up to a new reality.

Operator

Our next question is coming from the line of Pamela Kaufman with Morgan Stanley.

P
Pamela Kaufman
analyst

I had a follow-up question on the guidance for this year. Just wanted to see if you could walk through the puts and takes of the updated outlook through your [ org ] sales outlook, implies about $800 million less in sales this year at the midpoint versus before. But you narrowed your EBIT growth guidance slightly compared to your prior expectations. So can you just walk through -- I know you have the higher HMM savings, but where else are you finding offsets in the P&L because HMM wouldn't seem to explain the full impact on the lower impact on EBIT changing.

J
Jeffrey Harmening
executive

So Pam, Kofi and I are going to tag team this. Let me talk about the revenue and then Kofi's going to take the rest of the P&L side. On the revenue side, the way I think about our guidance is that in order to hit the low end of our guidance, let's call it, minus 1%, that would indicate that we'd see a continuation of the top line performance we saw in Q2 and which would indicate a little bit better volume and a little bit less price/mix than we saw in the second quarter, but in absolute terms, about the same as we saw in the second quarter.

The higher end of our guidance, which suggests that the categories get a little bit better, which we think they certainly could due to lapping, the SNAP, emergency reductions from a year ago in January through March and from our lapping pricing activity from March and April of last year. So those 2 things, combined with a little bit better share performance based on the out-of-stock situation changing near the end of the year, we could hit the top end of the guidance we suggested. So that kind of brackets the top line. I'll let Kofi talk a little bit more about the profitability.

K
Kofi Bruce
executive

Sure, Pam and thanks for the question. I would just note the HMM adjustment is pretty significant. As a reminder, the past 2 years, we've delivered below our historic levels of kind of 4%, at 3% for each of the prior 2 years due to the supply chain disrupted environment. We're now on pace to deliver 5% against an early expectation of 4%. That is the biggest single contributor, but we are seeing improvement in our inflation but not significant enough to change the rounding. So that's a modest contributor as well. But the other component in gross margin is the supply chain-related disruption costs.

So as I mentioned earlier, one of the features of this environment is supply chain stability has allowed us to get at some of those embedded costs we took on to operate in this environment, and we've made sequential improvement over the last 4 quarters on this and most acutely within our North America retail business.

And then lastly, the adjustment of our incentive for last year's peak level. So as you know, last year, a really strong year of performance, historically high levels of incentive-based comp, which is variable and based on the top and bottom line projections as that's both normalized at the start of the year to a base expectation of plan targets. And now as we take the top line down, that's almost $100 million in reduction in admin expenses. So as you take all of those, that gives us the confidence to keep within the range, albeit a little tighter as volume expectations come in from the top of the year.

P
Pamela Kaufman
analyst

That's very helpful. And just a follow-up question on gross margins, they're now back to pre-pandemic levels. So how are you thinking about the potential for gross margin expansion from here? On one hand, you have the benefit from HMM, but I'm assuming there will be some volume deleverage. So how should we expect gross margins to progress? And do you kind of see them at the right levels here?

K
Kofi Bruce
executive

Yes. Well, okay, I think it implied within our guidance would be a little bit less gross operating margin expansion, bolstered obviously, by gross margins in the back half as we see a step down -- a sequential step down in the contributions from price/mix as we lap last year, that's [indiscernible] actions fully by Q4 of this year.

I'd just note we've made significant progress at the gross margin level and bolstered in part, not just by HMM these past 2 quarters, but in part by the disruption costs that I mentioned earlier. 170 basis points to 120 basis points in the back half of last year and the first half of this year, respectively. So I would expect we'd see more normalized levels of gross margin expansion going forward kind of off of this base. There's still a little bit more disruption related costs to get out primarily in some of our other businesses outside of NAR. So that will give us a little bit of tailwind. But -- the impacts of deleverage.

Operator

And our next question is coming from the line of Matthew Smith with Stifel.

M
Matthew Smith
analyst

I wanted to follow up on the elevated level of HMM savings here in the year. You mentioned it's a step up relative to the prior 2 years where it was a bit lower because of inflation and supply chain issues. But how much of the elevated rate here this year is a pull forward from savings that you would expect next year? Or I guess that's another way of saying, just how sustainable is this elevated rate of HMM savings as you exit fiscal '24?

K
Kofi Bruce
executive

I would expect that if the supply chain environment remains stable and continues to stabilize even a little further, we will have the ability to deliver at least in line with our historic levels of about 4% HMM, 4% of COGS. I would expect that the contributions from getting out some of those other disruption-related costs that sit in COGS, to decrease a bit here as we've gathered a good chunk of them on the back of our NAR business and as we see maybe a smaller base of costs in the other 3 segments.

So all things equal, I think 4% would be a good long-term estimate for us to migrate back to -- provided the supply chain environment continues to cooperate.

M
Matthew Smith
analyst

And Jeff, maybe a follow-up about your share performance as you begin to lap the rebuild of competitive distribution, which I believe you said that begins to move into the base as you exit fiscal '24. You're holding and gaining share in majority of the distribution of your category. So would you expect your dollar market share performance to improve as you lap that competitive rebuild? Or are there other concerns like consumer value-seeking behavior or list price gaps that may need to be addressed -- as the share of shelf normalizes?

J
Jeffrey Harmening
executive

Yes. One of the things that I'm most pleased with is that over the last 5 years, particularly in North America Retail, we've gained share in 60% of our categories. And we continue to execute well. And the key our success once we start to lap the on-shelf availability and once we lap the pricing activities from March and April will be to the question that Andrew proposed, which is making sure we maintain our brand building support, really good brand building, make sure we execute against what I think is really good innovation and continue to execute in store. And if we do those things, and I would expect us to do those things, then our share performance will certainly improve over time. And hopefully, as we're exiting this fiscal year and beginning next fiscal year, we'll see that happen.

Interestingly, our dollar share performance has not been what we needed to be. In terms of pound share, we are growing pound share in about 40% of our categories. And then that's because even though our pricing trailed inflation, so we responded to inflationary pressures, we're actually more agile than our competitors. And so that provided us a dollar share benefit last year. And this year, it's a headwind, but we are growing pound share in roughly 40% of our categories.

Operator

Our next question is coming from the line of Michael Lavery with Piper Sandler.

M
Michael Lavery
analyst

I wanted to have a couple of follow-ups on the shelf availability. You said it's improving for competitors. Would you say that it's -- that there's still headwinds to come there? Or is that sort of all caught up to a normal level? And then on the promotional sort of dynamic related to that, you gave some color on how that environment looks. But just given your guidance update, it would seem like strategically, you'd rather take a little bit of the volume hit and push promo much harder. I suppose, first, is that a fair characterization? And what would make you lean in more on the pricing side?

J
Jeffrey Harmening
executive

On the on-shelf availability, I mean the competitors have kind of caught up to our levels, and that's been pretty stable for the past few months. And I wouldn't expect that to accelerate. So I think we've seen a stabilization in that. Now we'll see that they're on-shelf availability kind of -- which is equal to ours, as I remind you. So we actually -- we're doing quite well. So it's equaled ours. We'll see -- they will see that benefit for the next 3 or 4 months until [indiscernible] will happen a year from now. And so while it has stabilized, we'll see some of our competitors see a benefit for that for the next few months, and then they won't.

In terms of the pricing environment itself, I'm not really going to get into specifics of future pricing. What we do see is that, I think importantly, we see an inflationary environment ahead of us. I know there's been talk of deflation in some cases. And that may be true for things like commodities like milk and eggs. bu it's only not true for restaurants. Their inflation is actually outpacing ours. And we see inflation in the low single digits. If you look at the category pricing, and it's somewhere in the 2% to 3% range. So we see continued inflation even at a lower level. And usually, pricing tends to follow inflation because that's the basis on which we which we increase prices if we see an inflationary environment.

And so the -- as we look at trade-offs, I mean, our job is to create long-term value for shareholders, and we do that by serving consumers. And we'll do that by making sure that our brands are strong and by innovating and making sure the products are available when and where people want them.

M
Michael Lavery
analyst

Okay. That's really helpful. And just one quick follow-up on pet. You had mentioned the retailer inventory destocking and characterized it as a temporary headwind. Is that just because there's only so low they can go? Or do you expect it to reverse?

J
Jeffrey Harmening
executive

I do not expect it to reverse. I think there's only so low that it can go. And we may see a reduction again in the third quarter because I suspect that our sale -- our reported net sales are going to lack our sales out to consumers. And so we may have not have seen the bottom of that as we look at our third quarter but really is more of a -- I don't see a rebound in inventory levels and especially as some of our retailers specifically look to manage their working capital.

Operator

Our next question is coming from the line of Chris Carey with Wells Fargo Securities.

C
Christopher Carey
analyst

So just a couple of quick follow-ups for me. I guess, number one, and I think you've been clear about this, but maybe just put a ball on this. I mean in your prepared remarks, you mentioned that price/mix will remain positive in fiscal '24. I'm not sure if I'm reading too much into this, but is there an expectation that price/mix could turn negative in any given quarter ahead, near or medium term because of mix dynamics or potentially some step-up in promotional activity and just secondly, Jeff, you mentioned an expectation for some improvement in category growth. Is any of that just associated with lapping SNAP benefits as you get kind of deeper into your fiscal Q4?

K
Kofi Bruce
executive

I'll take the first part of that question, and then I'll let Jeff get you on the second. So look, our expectations on price/mix are really built around the fact that we'll be sequentially stepping down as we lap pricing actions that we took throughout last year. We should fully lap those by the time we get to the end of the fiscal year. We're not expecting any of the quarters to deliver a negative price/mix, but merely just a step down in the contribution from price/mix to total [ R&S ].

J
Jeffrey Harmening
executive

And Chris, this is Jeff. One point I'd add there is what you're seeing over the last couple of quarters is mix, even at the segment level is more of a headwind. As for example, our pet business is growing slower than the other parts of the business. That's a high price per pound business. As our foodservice business, which is a low price per pound is outperforming. And so there are mix elements within the segments that do depress the overall enterprise price/mix. And when you asked a question about growth at the category level. I mean there are a couple of headwinds. One is just a little bit of consumer behavior and feeling the economic pressure and a little bit less discretionary spending. And I don't frankly know when that will turn around. Consumers are certainly still stressed right now, they feel the impact of inflation over the past few years, and we certainly understand that. The thing that we -- that's more discrete really is the lapping of the SNAP emergency allotments benefits from last year. And those kind of go state by state, but they took place last year between January and March, and that may be a 1 point benefit to the categories that we're in. And so it's not a heroic increase but certainly a stabilization of the categories. And we'll start to -- as I said, we'll start to lap that here in the next month or so throughout our fiscal third quarter.

J
Jeff Siemon
executive

Okay. Unfortunately, I think that's all the time we're going to have this morning. Thank you for all the good questions and discussion. I appreciate your time and attention, and we will look forward to catching up in the new year. In the meantime, happy holidays to everyone, and please reach out if you have any follow-ups to the IR team. Thanks.

Operator

That does conclude the conference call for today. We thank you for your participation. I ask that you please disconnect your lines.