Don't bet against cereal, General Mills executives say

The cereal business has not gone soggy, General Mills maintains, and for the first time in more than a year the company posted results Wednesday to back up that claim.

Product innovation and new marketing initiatives helped the company post a 4 percent increase in first-quarter U.S. cereal sales over a year ago, most it from increased volume, not just higher prices. That performance comes after a disappointing 2 percent annual decline in U.S. cereal sales during the company's fiscal year 2013, completed May 26.

Industrywide weakness has led analysts to question whether cereal is losing out to myriad options, from toast to Egg McMuffins.

But the president of General Mills' "Big G" U.S. cereal business, Jim Murphy, told analysts in the conference call that cereal is alive and well, despite recent declines.

The problem: a shortage of new ideas, new marketing and new product news in the cereal category, he said. "These are not structural issues. These are issues of innovation and execution. In Big G we are taking specific steps to drive growth in our cereal business in [fiscal] 2014 and beyond."

U.S. cereal sales, long dominated by Golden Valley-based General Mills Inc. and Michigan's Kellogg Co., have been falling for three consecutive years. During Wednesday's earnings conference call, General Mills itself presented Nielsen market data showing annual sales volume declines averaging 2.3 percent.

"There has been a lot of concern about cereal," said Jack Russo, a stock analyst at Edward Jones. "The category has been weak, but I think Mills responded to that appropriately, saying they are big believers in the category long-term."

The packaged food giant said net profit was $468 million, or 70 cents per share, for the 13 weeks ended Aug. 25. That's down 15 percent from a year ago. But when adjusted for one-time items, earnings per share were up 6 percent from a year ago. Sales were $4.37 billion, up 8 percent.

"It's a good start," General Mills CEO Ken Powell said in an interview with the Star Tribune. "We're in line with expectations and we are encouraged by our innovation.

"We like our new lineup of products," he said, noting fresh offerings in cereal, yogurt, snack bars and baking products.

General Mills shares closed Wednesday at $50.15, up 37 cents on a day the overall stock market was generally up.

On the down side, General Mills' overall "profitability remained constrained" during the quarter, Erin Lash, a stock analyst at Morningstar, said, referring to the company's declining gross profit margin.

The company's booming snacks business, one of its largest and home to Nature Valley and Fiber One bars, led the way with a 10 percent gain in sales over last year's first quarter. "Our U.S. snacks business is off to a terrific start this year," Powell told analysts in a conference call.

Then there was the improved performance in cereal, General Mills' largest U.S. business and one of its most profitable.

The company's Honey Nut Cheerios Medley Crunch is the biggest product launch in the cereal category this year, Murphy said. And General Mills' co-branded cereal with Hershey has been the top-selling new chocolate item.

As for General Mills' struggling U.S. yogurt business, its new Greek 100 offering continued to have strong sales. Powell told analysts that the company's Greek business grew more than twice as fast during the quarter as the overall Greek-style yogurt segment. But General Mills' Greek share remains relatively small, and quarterly U.S. Yoplait sales only matched year-ago results.

On the international front, General Mills sales were up 22 percent, led by growth through acquisitions. Operating profits in international were flat over the same time a year ago.

Also, international operations bore the brunt of input cost increases early in the year, particularly due to higher dairy prices in Europe.

General Mills executives Wednesday reaffirmed their sales and earnings guidance for fiscal year 2014.

Mike Hughlett • 612-673-7003