Costs, prices, sales all up at General Mills

There's less cereal in the box and more money in the bank for General Mills Inc.

The Golden Valley-based food company on Wednesday reported 7 percent sales growth to $3.07 billion for the first quarter of 2008, its first since it embarked on a price increase in its line of Big G cereals by shrinking the boxes.

It was a gamble -- the company saw sales flag in 2005 when it attempted to push cereal prices -- but the food industry has struggled with record- or near-record-high prices for commodities like corn, wheat and soybeans, along with creeping energy costs and inflation in wages and benefits.

"These costs have been marching upward for several years now," CEO Steve Sanger said in a morning earnings call with analysts, adding that the company may need to take more price increases as the year unfolds.

Earnings for the quarter ended Aug. 26 were up 8 percent to $289 million, with earnings per share of 81 cents, one penny more than consensus analyst estimates. The company reaffirmed its earnings per share guidance of $3.39 to $3.43 per share for the year.

The stock rose 18 cents to close at $58.85.

"We had a terrific quarter," Ken Powell, president and chief operating officer, said in an interview.

The cost of raw materials, energy, labor and other items have marched steadily upward: 6 percent in 2005, 5 percent in 2006 and 4 percent this year, according to company documents.

Those costs are estimated to rise 5 percent in 2008, the company has said.

Along with the low-single-digit increase in cereal, there's been a handful of increases in other products, as well as mid-single-digit price increases in yogurt and the bakeries and food service division.

"The key challenge everyone's facing today is how to cover the rise in costs without driving away sales," said Bill Bishop, of the food retail analyst firm Willard Bishop. "There's no question that there's a limit to how much you can shrink a box, so this particular tactic isn't going to be something they can replicate very much longer."

The market is not uniformly sensitive to price increases, Bishop said, meaning some products may be better candidates than others for price increases, and some customers may be less likely to care than others about price increases.

"It's high five to their management to pull this thing off," he said. "It's a tricky balance."

The U.S. retail segment saw sales climb 6 percent to $2.03 billion. International sales grew 19 percent in the first quarter to $599 million. Sales in bakeries and food service fell 1 percent to $441 million.

The company's snacks division grew sales by 16 percent in the first quarter, the highest of any division. Some of that growth came from a longtime brand, Nature Valley, first developed in the 1970s. The granola bars are sold in 60 countries today, including India, South Africa, Mexico and Greece, with global sales expected to quadruple by 2010, according to company spokeswoman Kirstie Foster.

The Big G cereal division saw sales climb 5 percent. Trailing further behind were two of the company's usual stars for quarterly growth, Yoplait, up 3 percent, and the organic products line, Small Planet Foods, which fell 4 percent.

The yogurt results were "a little bit disappointing," compared with the generally positive numbers elsewhere in the earnings report, said William Frels, who manages mutual funds with 1.6 million General Mills shares at Mairs & Power Inc. in St. Paul.

He called it a "real positive showing, especially when you consider the fact that they've been bucking some real headwinds in input costs."

New yogurt products may help that division: The company's newest yogurt products include Fizzix, a carbonated yogurt for kids, due in supermarkets nationwide this month.

Matt McKinney • 612-673-7329

Matt McKinney • mckinney@startribune.com