- The Washington Times - Wednesday, March 18, 2009

MILWAUKEE (AP) - High costs weighed down General Mills’ third-quarter profit even as sales of top brands like Cheerios, Pillsbury and Gold Medal flour grew as more consumers ate at home.

But with ingredient costs expected to fall and more marketing driving sales, General Mills Inc. gave a brighter outlook for its fiscal year.

Still, the company’s shares fell more than 11 percent to their lowest point in more than three years, as the 33 percent drop in profit was worse than analysts expected. The results were weighed down by the high ingredient costs, a stronger U.S. dollar, which hurts foreign sales, and a tough comparison to the previous year, when the company’s grain milling business made more money.

Chief Executive Ken Powell said the company was confident in its business, especially as people spurn restaurants and eat more from grocery stores. General Mills is boosting its marketing spending, which was up 6 percent in the quarter, to highlight its brands for shoppers who may be tempted to switch to cheaper store brands. Powell said marketing is key to attracting new customers and maintaining them.

“If you do it well and your product quality is high you can keep more than your fair share,” Powell said in an interview.

Overall, revenue rose 4 percent in the quarter to $3.54 billion, which met analysts’ estimates. But the stronger dollar reduced revenue growth by 3 percentage points. Companies with business overseas see less benefit from foreign currency exchange as the dollar rises.

For the period ended Feb. 22, the Golden Valley, Minn.-based company earned $288.9 million, or 85 cents per share, down from $430.1 million, or $1.23 per share, a year ago.

Excluding an insurance settlement, the reversal of a tax benefit and other items, earnings were 79 cents per share compared with 87 cents in the prior-year period. Analysts surveyed by Thomson Reuters, who generally exclude one-time items, expected 88 cents per share.

General Mills shares fell $6.03, or 11 percent, to close at $47.63. They traded as low as $47.08 earlier in the day.

Citigroup analyst David Driscoll wrote to clients that commodity inflation was too big of a drag on the quarter, with costs up as much as 11 percent, to outweigh sales growth. The company has said it expects ingredient costs to be up 9 percent for the year, though they will moderate in the fourth quarter. Driscoll said that will help margins, which will bolster profits going into the next fiscal year.

Overall net sales in the retail segment, which includes Yoplait Yogurt and Wheaties, grew 8 percent to $2.5 billion.

Gold Medal flour sales increased 38 percent, while Pillsbury refrigerated dough sales rose 12 percent, which general Mills said reflects how consumers baked more at home during the holidays. Sales in the cereal segment grew 13 percent, as more people choose to eat breakfast at home to save money, Powell said.

Revenue for international operations fell 5 percent to $580 million due to the stronger dollar.

Net sales in the bakeries and food service segment fell 6 percent to $462 million while volume dropped 12 percent. The segment serves restaurants and retail outlets, where consumers are cutting spending, and includes the grain milling business, which was hurt because of falling commodity prices, said Christoper Shanahan, a research analyst with Frost & Sullivan.

Powell said that volatile markets last year helped General Mills to a $37 million one-time gain in the grains business, which isn’t something it could match again.

To recoup high ingredient costs, food companies have been raising their prices. But even that’s moderating under pressure from retailers. Many food companies are not announcing full price rollbacks, but are doing promotions that give shoppers temporary relief.

Labor Department data out Wednesday showed food costs dipped 0.1 percent last month but are still up 4.7 percent over the past year. Prices for meat and dairy products fell, while fruits and vegetables rose.

General Mills said it saw strong sales of products at full price in the quarter, which Powell said shows it has the right products at the right prices.

Shanahan said the company’s marketing and emphasis on its core brands through innovations _ such as new banana nut Cheerios _ will help drive sales.

“They’re seeing market share growth, they’re focusing on their core product brands, which is smart to do in this economy,” he said.

The company raised its fiscal 2009 adjusted earnings outlook to a range of $3.87 to $3.89 per share from a range of $3.83 to $3.87 per share. But the increased range is still below Wall Street’s expectations for full-year net income of $3.94 per share.


AP Business Writer Michelle Chapman in New York contributed to this report.

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