High costs weigh on General Mills 1Q profit

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Displayed is a box the General Mills product Fiber One cereal, Tuesday, Sept. 20, 2011, in Philadelphia. General Mills Inc.’s fiscal first-quarter net income fell 14 percent, but adjusted results beat Wall Street’s expectations as revenue climbed on higher prices, solid demand and new products. (AP Photo/Matt Rourke)

NEW YORK (AP) — General Mills Inc.'s fiscal first-quarter net income fell 14 percent as one of the nation's biggest food companies continued to deal with high ingredient and energy costs. But adjusted results beat Wall Street's expectations as revenue climbed on increased prices, solid consumer demand and new products.

The Minneapolis-based company that makes Cheerios cereal and Haagen-Dazs ice cream also reaffirmed its full-year adjusted earnings outlook. On the news, its stock gained 95 cents, or 2.5 percent, to close at $38.44 Wednesday. The shares have traded between $34.54 and $40 over the past year.

General Mills, like nearly all food companies, has raised prices to offset higher costs for commodities from corn to fuel. But the company — like others in the sector — has had to weigh its price hikes against just how much shoppers are willing to absorb. Consumers remain cautious about their spending in the uncertain economy.

The company said Wednesday that its net income fell to $405.6 million, or 61 cents per share, for the period ended Aug. 28, down from $473.6 million, or 70 cents per share, a year earlier. Removing the effects of a reduction in the market valuation of commodities positions, adjusted earnings came to 64 cents per share. This topped the 62 cents per share that analysts surveyed by FactSet predicted.

Revenue rose 9 percent to $3.85 billion from $3.53 billion, beating Wall Street's forecast of $3.81 billion.

The period included one month of results for Yoplait, which the company acquired a controlling stake in on July 1 for $1.15 billion from a French investment firm and dairy group. General Mills said the Yoplait deal added 3 percentage points to its revenue increase.

Price increases also boosted results. Ian Friendly, executive vice president and chief operating officer for the division, said during a conference call that prices across the unit climbed almost 5 percent in the quarter, on average. He expects a mid-single digit increase in the division's full-year sales, driven by higher prices.

Sales of products — both new and old — also were strong.

For the quarter, cereal sales edged up 1 percent, helped by brands such as Chex and Cinnamon Toast Crunch. New products included Cinnamon Burst Cheerios, Cocoa Puffs Brownie Crunch and Fiber One 80 calorie cereal also added to results. At the snacks unit, sales rose 17 percent, driven by Nature Valley and Fiber One snack bars. And sales for the baking products division increased 5 percent, while Pillsbury segment sales gained 4 percent. Results, however, were disappointing for the meals unit, which posted a 4 percent sales decline due to lower shipment volumes for dinner mixes, canned vegetables and soup.

General Mills has supported its products by spending on media and advertising, which was up 7 percent in the quarter. Such efforts are important for food makers because shoppers are likely more critical of what brands they buy when faced with higher prices. While shoppers are known for their brand loyalty, Ken Powell, General Mills chairman and CEO, emphasized that companies must still make investments in areas such as advertising and research and development in order to keep such loyalty.

General Mills' overseas performance also was strong, with revenue up 30 percent to $856 million. This included one month of Yoplait international results. The international results were propelled by strength in Europe, which reported a 36 percent gains. This was followed by a 15 percent gain for the Asia/Pacific region and a 12 percent increase for Latin America. Canada posted an 8 percent increase.

"Consumer trends are a tale of two worlds as an increasing number of consumers in emerging markets are buying branded packaged goods as their income expands," Powell said. "But high unemployment, a soft housing market and concerns about the economy are pressuring consumer confidence in spending in developed markets."

Powell said General Mills is looking to aggressively expand outside of the U.S., but that the U.S. remains a very attractive market in part because of its multicultural makeup.

"We see the U.S. as a place to grow and prosper," he said.

Powell predicts General Mills' earnings will rise over the next nine months. The company maintains that its fiscal 2012 adjusted earnings will come in between $2.59 and $2.61 per share. Analysts expect earnings of $2.61 per share for the year.

CFO Don Mulligan said General Mills expects a double-digit revenue increase for the year.