Cost Pressures Starving General Mills

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Cost pressures and the outlook for its bakery segment will likely be the main focus points when General Mills (GIS) reports third-quarter earnings before the market opens on Thursday. Following its earnings release, the company will hold a conference call at 8:30 a.m. EST.

General Mills is expected to report about an 8% decrease in earnings from a year ago. I estimate GIS will report 66 cents per share vs. last year's 73 cents per share; the Street consensus is for 65 cents per share.

Soaring energy costs and commodity prices are at the root of General Mills' cost pressures. The company has also spent an enormous amount of money on advertising to combat volume declines in prior quarters. Sales growth will pick up, with strength in soup and yogurt products, but I do not believe it can offset the rise in costs. Also, the Pillsbury products division is still having some difficulties.

While higher prices and productivity improvements will not offset the restrained sales and higher costs, positive currency gains should help the international results. Lower interest charges (lower debt levels) and an approximate 3% reduction in shares should help net margin and EPS.

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