Profit jumps, sales flag at General Mills

General Mills Inc. reported a jump in quarterly profits Wednesday, as strong performance overseas offset rising commodity costs and lower U.S. cereal sales.

The Golden Valley-based packaged foods giant posted fiscal third-quarter earnings of $392 million, or 59 cents per share. Adjusted for one-time events, earnings per share were 56 cents, up from 49 cents a year earlier and in line with stock analysts' estimates.

Quarterly sales were $3.65 billion, up 2 percent from a year ago and a little less than the $3.69 billion expected by analysts. "It was kind of a mixed bag this quarter," said Jack Russo, a stock analyst with Edward Jones & Co.

General Mills shares fell 67 cents, or 1.8 percent, to close at $36.24.

In the United States, where General Mills generates the bulk of its revenue, quarterly retail sales were down 1 percent to $2.51 billion, and operating profits were slightly less than in the previous year. "The company faces persistent headwinds with fragile consumer confidence and rising commodity costs," said Erin Lash, a stock analyst for Morningstar Inc.

Sales of snacks like Nature Valley and Fiber One bars were strong, but the performance of General Mills' U.S. cereal unit was particularly lackluster. Cereal sales were down 6 percent from a year earlier.

However, General Mills Chief Executive Ken Powell noted in a conference call with analysts that the cereal business faced a tough comparison with last year's third quarter. That's when General Mills launched Chocolate Cheerios and Wheaties Fuel, which prompted a surge in cereal sales.

General Mills, like most packaged food companies, has been raising prices in recent months. But one analyst asked Powell why those price increases didn't appear to materialize in higher revenue for the quarter.

Powell said the increases were gradual and that the full effect should be felt during the company's current fiscal quarter. General Mills is increasing prices by percentages in the mid-single digits on just over half of its portfolio of products.

General Mills' food service segment did well, with sales and operating profits rising nicely. And the company had a bang-up quarter in Europe and Asia, leading to an 8 percent rise in international sales and a sharp increase in operating profits.

Sales of the firm's Old El Paso Mexican foods line were strong in Europe. Its Wanchai Ferry frozen food offerings continued to blossom in China. And global sales of Häagen-Dazs ice cream were solid.

General Mills' international reach would get a boost from the pending acquisition of PAI Partners' 50 percent stake in French yogurt maker Yoplait, a $1.1 billion deal unveiled last week. While General Mills has the license to sell Yoplait in this country, an ownership stake would give it access to Europe and emerging markets.

Yogurt "is one of the best global categories," Powell told analysts. "There are very favorable growth characteristics, and we will be able to participate fully and globally."

Under French regulations, General Mills is currently deemed to be in "exclusive talks" with PAI, and as part of that process must consult with Yoplait's unions and workers about the sale. Powell said the deal could close sometime between the beginning of June and the end of August.

Regarding the recent earthquake in Japan, General Mills Chief Financial Officer Don Mulligan told analysts that one of the company's warehouses there was destroyed, but its workers were safe. General Mills has a 50 percent interest in a joint venture in Japan that makes and sells Häagen-Dazs.

The earthquake, Mulligan said, "will certainly have an impact on this business."

Mike Hughlett • 612-673-7003