General Mills: Profit dips

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At General Mills, the maker of Cheerios, cost-cutting is a way of life: Company execs meet weekly to discuss ways to streamline products. The company's Holistic Margin Management system has helped them sustain higher margins than their peers.

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NEW YORK (CNNMoney.com) -- General Mills Inc., halfway through its fiscal year, reported a 3.1% quarterly profit decline on Wednesday but raised its expectations for the year because of strong worldwide demand for its products.

The Golden Valley, Minn.-based cereal maker's earnings per share fell 3.1% to $378.2 million, or $1.09 per share, from $390.5 million, or $1.14 cents per share, last year.

Shares were flat, closing at $61.23.

Results included a 49-cent net reduction related to the value of commodity positions and a 22-cent gain from the sale of Pop Secret. Without the current charge, earnings per share would have totaled $1.36, up from $1.11 this period the previous year.

Analysts polled by Thomson Financial, which typically excludes one-time items from its estimates, had forecast $1.23 per share.

Net sales at General Mills (GIS, Fortune 500) rose 8% to $4.01 billion, roughly matching the Thomson Financial consensus of analysts' estimates.

Erin Ashley Smith, a securities analyst at Argus Research Co., said the company's consumers know and trust the company's brands as affordable and healthy options.

"Consumers will choose a yogurt brand they trust if it's only slightly more expensive than a private label," Smith said. "Brands that don't have the recognition of Yoplait, for example, have a tough time competing."

General Mills raised earnings targets for fiscal 2009. The company now expects earnings of $3.83 to $3.87 per share, up from $3.81 to $3.85. Analysts expect $3.89 a share.

In a conference call, CEO Ken Powell said the company is on track for "solid year of growth."

General Mills has benefited as the recession has forced more consumers to eat in instead of going to restaurants, he said.

"This trend is a good one for General Mills overall, because at-home food is our biggest business," Powell said.

The Pillsbury brand enjoys a 68% market share, and Totino's pizza products account for one-third of division sales, Powell added.

For the first half of fiscal 2009, General Mills saw sales gains in every division and segment in the business, with more than half growing at double-digit rates, Powell said.

Price increases "are part of our story here," Powell said. "But it showed our products are staples for many consumers, ranking either No. 1 or No. 2 in major retail categories."

Powell said the company planned to introduce new flavors of cereal brands like Cheerios and Shredded Wheat, as well as varieties of Progresso soup designed to appeal to Hispanic consumers. "Innovation is the key to driving sales and earnings growth," he said.

General Mills is a rare bright spot in the S&P 500 - outperforming it by 40% over the last year - and the food manufacturing industry as a whole. In September, General Mills reported that revenue rose 14% in its first fiscal quarter.

The company is performing much better than its rivals. Shares of Kraft Foods (KFT, Fortune 500) and cereal rival Kellogg (K, Fortune 500) are both down almost 20%. ConAgra Foods (CAG, Fortune 500), which makes Chef Boyardee and Hebrew National brands, has plummeted almost 40%.

Smith said she expected the company to continue doing well through the fiscal year. But the stock price is "challenging," she said.

"One bad event might be looked at as more of a negative than it should," Smith said. "If they don't outperform in one quarter, it could punish the stock."