General Mills Earnings Crush Forecasts; Outlook Confirmed

General Mills Inc. (GIS) on Tuesday reported a 19 percent rise in quarterly earnings as price increases and stronger sales of Pillsbury products helped offset higher ingredient and energy costs.

The company's stock, however, fell in the afternoon as some investors wondered why the maker of Cheerios cereal (search) and Progresso soups (search) did not raise its full-year earnings forecast after beating second-quarter expectations. The stock initially rose to an 18-month high on the earnings news.

"Investors are saying this is a big beat of the estimate, but clearly they expect to give this back in the second half," said Dave Kolpak, analyst at Victory Capital Management, which owns 2 million General Mills shares.

The Minneapolis-based company, whose products range from Wheaties cereal to Pillsbury refrigerated dough, has raised prices to try to make up for increased food commodity and energy costs which it could not offset with improved productivity.

Profit for the fiscal second quarter ended Nov. 28 rose to $367 million, or 97 cents per share, from $308 million, or 81 cents a share, a year ago.

Excluding one-time items, earnings were 99 cents a share. On that basis, Wall Street analysts had expected the company to earn between 83 cents and 90 cents per share with an average view of 87 cents, according to Reuters Estimates.

Many of the increased prices have been passed through retailers to consumers, though promotional spending programs with retail customers have temporarily limited some of the benefit for General Mills, Steve Sanger, chairman and chief executive, told Reuters.

"The price increases are going through, but some of them are offset by promotional allowances to cover previously made promotional commitments to our customers," Sanger said. "As time goes by, those commitments end."

While most other food makers have also raised prices, competitors have not met General Mills' increases for soup and yogurt, Sanger said. That can lead to increased promotional spending by the company.

"We always modify our promotional plans to try to stay competitive," Sanger said.

Sales rose 4 percent, to $3.17 billion, helped by price increases. Analysts on average had forecast $3.18 billion, according to Reuters Estimates.

Volume, a measure of products shipped that factors out currency and price fluctuations, rose 1 percent.

U.S. retail segment sales rose 3 percent to $2.28 billion, helped by a 4 percent volume increase in its Pillsbury USA (search) and baking products businesses.

Like many packaged food companies, General Mills has been under pressure from mounting concerns about obesity in the United States. On Tuesday, the company announced an online weight-management program that provides meal plans designed to help consumers lose a pound a week for 10 weeks.

A previously announced plan to make its cereals out of healthier whole grains could give General Mills an advantage with consumers, Kolpak said.

"I think they are doing some smart stuff and I would not envy anybody competing with them right now," he said.

General Mills also affirmed that it expects 2005 earnings of $2.75 to $2.80 a share. That includes 10 to 15 cents of one-time charges, but not the effect of PepsiCo Inc.'s (PEP) purchase of General Mills' stake in a joint venture, announced on Dec. 13.

Excluding one-time items, the forecast is $2.85 to $2.95 a share. On that basis, analysts on average forecast $2.85 a share, according to Reuters Estimates.

General Mills shares were down 47 cents, or 1 percent, at $48.65 on the New York Stock Exchange late Tuesday afternoon. The shares earlier in the session rose to $49.57, their highest level since June 2003.