General Mills Earnings: Behind the Numbers

MINNEAPOLIS ( TheStreet) -- General Mills ( GIS) shares fell Wednesday morning after the food processor forecast rising commodity cost inflation.

General Mills, the maker of Cheerios cereals, Nature Valley snack bars, Progresso soups and Totino's pizzas said costs will rise between 4% and 5% this year as prices increase for fuel, dairy, resin-based packaging, cocoa and wheat -- and those prices are expected to rise again in fiscal 2012.

Investors traded General Mills' stock down 2.8% in early trading to $35.86.

General Mills has had success in the past dealing with higher costs through expense reductions and the introduction of new higher-priced products.

"They have a lot weapons in their arsenal to try to offset that beyond raising prices, but they're not immune," Morningstar analyst Erin Lash told Reuters.

Despite the anticipated rise in costs, General Mills reiterated its previously announced fiscal 2011 forecast, calling for earnings per share between $2.46 to $2.48 and net revenue growth in a low single-digit percentage rate.

In the recent fiscal third-quarter quarter, General Mills earned $392.1 million, or 59 cents per share, up 17.9% compared with a profit of $332.5 million, or 48 cents per share, in the year-earlier period.

Excluding the effect of mark-to-market on its commodity hedging positions, General Mills earned 56 cents, matching analysts' consensus call.

Revenue for General Mills, a dividend payer with a yield around 3%, rose 1.6% to $3.65 billion, falling short of the $3.69 billion analysts had expected.

In the U.S. profit from sales fell 1% on a 6% decline in cereal sales. In Europe and Asia, however, sales grew 8%. General Mills generates about 70% of its revenue from the U.S. and nearly 20% from Europe and Asia.

General Mills' earnings release comes days after Barron's released a bullish report on consumer staple stocks, including GIS, Kellogg ( K), Procter & Gamble ( PG), and Campbell Soup ( CPB). The basic thesis of the article was that consumer staple businesses are not leveraged to the overall growth of the economy but rather providers of essential household products. That argument is certainly a plausible thesis for the long term, according to RealMoney contributor Shad Gad .

Gad added that investors should be prepared for near-term volatility as grain costs continue to rise, a trend that is likely to pressure General Mills' margins.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Kellogg announced price increases on its cereals to help offset rising commodity costs for key ingredients like grain and sugar.

General Mills announced similar initiatives and is currently implementing a 3% across-the-board price hike to handle food inflation.

Brands like Cheerios, Hamburger Helper and Pillsbury are indeed consumer staples and probably hold a little pricing power, Gad said, as yogurt and cereal sales are generally more predictable than sales of industrial goods, for example.

General Mills is set to acquire more than a 50% stake in French yogurt maker Yoplait , a deal valued at $1.1 billion.

Private equity firm PAI Partners and Sodiaal, a dairy cooperative, confirmed that General Mills made a binding offer to acquire PAI's stake in Yoplait.

A Sodiaal representative said the deal would likely close by the end of the first fiscal quarter.

The acquisition will work to resolve a dispute between Yoplain and General Mills. Since 1977, General Mills held the license to distribute Yoplait products in the U.S. That parternship was due to expire in 2012, and the pair had difficulty agreeing on new terms for renewal. Yoplait threatened to end the licensing agreement, leading General Mills to seek arbitration in 2011.

"This deal represents a solution," a spokesman for PAI said.

For Sodiaal, the deal represents market share and sales growth potential in international markets since General Mills has operations in emerging markets such as India and China.

Under the terms of the deal, Sodiaal will retain an equal stake in the licensing business of Yoplait, while General Mills will take a 51.5% stake in the operating business.

Yoplait is the only yogurt brand distributed by General Mills, according to the company's Web site. Yoplait is the world's second-largest yogurt maker behind France's Danone ( DANOY), according the New York Times.

In the U.S., Yoplait enjoys a market share around 35%, Reuters reported.

General Mills' acquisition of a majority stake in the yogurt company's operating business helps protect the processed food giant's distribution rights, and also removes some risk of competitors gaining moving in on the business, according to some analysts.

Under the proposed transaction, General Mills said it would partner with Sodiaal in expanding and growing the Yoplait brand and businesses in France, Europe and around the world.

The sale also helps PAI which had been looking to divest its stake in Yoplait for some time. PAI first acquired Yoplait in 2002.

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

>To follow the writer on Twitter, go to

>To submit a news tip, send an email to:


>>See our new stock quote page.

Get more stock ideas and investing advice on our sister site,
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

If you liked this article you might like

Next Week's Market Game Plan: Cramer's 'Mad Money' Recap (Friday 3/16/18)

Next Week's Market Game Plan: Cramer's 'Mad Money' Recap (Friday 3/16/18)

One of the Biggest Profit Centers for Investment Banks Has Hit the Skids

One of the Biggest Profit Centers for Investment Banks Has Hit the Skids

Tyson Foods CEO: We Are Not Afraid to Do a Big Deal

Tyson Foods CEO: We Are Not Afraid to Do a Big Deal

Big Earnings Week Ahead: Cramer's 'Mad Money' Recap (Monday 2/26/18)

Big Earnings Week Ahead: Cramer's 'Mad Money' Recap (Monday 2/26/18)

General Mills Thinks Outside the Box; Markets Roar Back -- ICYMI

General Mills Thinks Outside the Box; Markets Roar Back -- ICYMI