December 16, 2010 / 12:22 PM / 7 years ago

UPDATE 4-General Mills keeps outlook despite inflation

5 Min Read

* Q2 adj EPS 76 cts misses Street view of 78 cts

* Net sales up 1 pct to $4.07 bln; misses view

* Affirms FY 2011 EPS forecast for $2.46-$2.48

* Sees $1 bln in cost savings by end of fiscal 2012

* Shares up about 1 percent (Revises first sentence, adds CEO comments, updates share price)

By Martinne Geller

NEW YORK, Dec 16 (Reuters) - General Mills Inc (GIS.N) said price increases on foods like frozen vegetables and baking products should help it meet its profit target for the current year.

The company also said it is on track to cut $1 billion in costs by the end of May 2012, which should help offset rising commodity costs, which contributed to weaker-than-expected second-quarter results. And new products like Cinnamon Burst Cheerios and Gluten Free Bisquick will lift sales.

The company posted earnings and sales on Thursday that missed Wall street estimates, hurt by higher commodity costs and spending on promotions such as a soup sampling program.

General Mills, which also sells Green Giant vegetables and Progresso soup, is part of a U.S. packaged food industry that has been squeezed in recent months by rising prices for ingredients like wheat and cocoa, and concerns that recession-weary consumers will resist the price increases needed to help cover those costs.

"Consumers are now accustomed to reduced prices, and getting them to pay a higher price may not be easy," Morningstar analyst Erin Swanson said. But General Mills has such strong brands -- including Pillsbury and Betty Crocker -- that it is unlikely to be disproportionately hurt, she added.

Net income was $613.9 million, or 92 cents per share, in the company's fiscal second quarter ended on Nov. 28, up from $565.5 million or 83 cents per share a year earlier.

Excluding a tax benefit and accounting for commodity hedges, earnings were 76 cents per share.

Net sales rose 1 percent to $4.07 billion.

Analysts on average were expecting earnings of 78 cents per share on revenue of $4.11 billion, according to Thomson Reuters I/B/E/S.

The company actually sold 3 percent more food, but more of that came from lower-priced items, while it also had to rely on discounting to attract shoppers. Margins were also hurt by higher costs for dairy, resin-based packaging, fuel, cocoa and wheat.

Prices Set to Rise, but No Word on Yoplait

The current conditions contrast with those that led General Mills to post very strong profit growth in the year-earlier quarter, when price increases taken during the last bout of commodity inflation fattened profit margins as costs receded.

The company has announced price increases on some of its baking products, snacks and frozen vegetables, and executives said increases should take effect in January and February. As the fiscal year progresses, the company expects the number of promotions to ease throughout the industry.

"As we go forward into the new calendar year, we're going to see some return to inflation," Chief Executive Ken Powell said in an interview. "We live in volatile times."

General Mills expects costs to rise about 4 to 5 percent this year. The company, typically one of the industry leaders in keeping costs down, said it is on its way to reducing costs by $1 billion by the start of fiscal 2013. It expects improvements in its supply chain to reduce costs by more than $4 billion over the next decade.

General Mills also distributes Yoplait yogurt in the United States. Industry=watchers say it could be a suitor for the 50 percent stake in Yoplait that private equity fund PAI Partners wants to unload in a sale slated to begin on Monday. [ID:nLDE6AM1TZ]

Powell declined to comment on potential interest in Yoplait, but said that smaller, bolt-on acquisitions were part of General Mills' growth strategy, especially if it can expand the company's position in a category either in the United States or abroad. It announced last month plans to acquire the Mountain High yogurt brand from Dean Foods. (DF.N)

General Mills still expects full-year earnings of $2.46 to $2.48 per share, excluding one-time items.

Shares of General Mills were up 0.8 percent at $36.66 in early afternoon on the New York Stock Exchange. (Reporting by Martinne Geller; Editing by Derek Caney, Dave Zimmerman and Matthew Lewis)

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