General Mills Posts Small 2Q Profit Jump

By JOSHUA FREED

MINNEAPOLIS – Cereal and snack-foods maker General Mills Inc. on Thursday reported a small increase in second-quarter earnings but said sharply rising commodity costs would constrict its full-year profit.

The maker of Wheaties cereal and Betty Crocker baking mixes said quarterly income rose slightly to $370 million, or 97 cents per share, from $367 million, or 92 cents, the year before. Both periods include accounting provisions for convertible debt, which reduced earnings by 5 cents per share. Sales were $3.27 billion, up 3 percent from $3.17 billion a year ago.

Analysts surveyed by Thomson Financial expected 96 cents per share on revenue of 3.25 billion.

Operating profit fell 4 percent in General Mills’ largest division, U.S. retail, dipping to $545 million from $567 million a year ago. But sales in that division rose 3 percent to $2.34 billion.

Chief Financial Officer Jim Lawrence said U.S. retail operating profits rose for the first half, and that the division isn’t in need of a turnaround. “We think in fact the business is performing solidly for the first half,” he said.

International sales gained 8 percent to $472 million, and bakeries and foodservice sales rose 2 percent to $465 million.

General Mills recently boosted its earnings forecast for the fiscal year ending in May to a range of $2.80 to $2.85 per share, including about 8 cents of expenses related to convertible debt accounting. Analysts currently predict fiscal 2006 income of $2.91 per share.

Lawrence said the strong first half would allow General Mills to stick by its full-year guidance. But he said fuel and commodity cost increases would be $165 million for the full year – $60 million more than expected. That and double-digit increases in advertising spending and increased spending on employee benefits “are restraining our earnings forecast for the second half of the year,” he said.

To cut costs, General Mills has cut 140 different items from its lineup over the past 18 months, Lawrence said. Examples include reducing the number of pasta varieties in its Hamburger Helper lineup. Besides saving money on the manufacturing side, it lets retailers turn the shelf space over to General Mills products that sell better, he said.

General Mills has historically been a heavy TV advertiser, and its new advertising money is focused there, too, Lawrence said. General Mills has revived its Jolly Green Giant ads to promote its vegetables, and some of the ad spending is also being directed at Hamburger Helper, another storied brand. Lawrence said they’re focusing on the brands where advertising can make the most difference: “It’s not that we have sort of a retro strategy,” he said.

General Mills is second only to Kellogg Co. in the cereal business, and also competes with low-priced cereals that often mimic its well-known brands such as Cheerios.

General Mills shares rose 75 cents, or 1.5 percent, to close at $50.10 on the New York Stock Exchange, about midway between their high of $53.89 and low of $44.67 over the past year.

—

On the Net:

General Mills: http://www.generalmills.com