Is General Mills Going Through the Grinder?

General Mills' (NYS: GIS) solid first-quarter results beat estimates despite a difficult economic environment. However, rising costs took away some of the shine from its strong sales.

A quick look at the quarter...
General Mills' first-quarter net sales grew 9% to $3.85 billion based on this quarter last year. However, the cost of sales was up by almost 20%. This was likely the result of high ingredient and energy costs. This led to a fall in operating profit and the bottom line by 16% and 14% to $638.9 million and $405.6 million, respectively.

Sales growth was largely affected by increased product prices and the revenue contributed by Yoplait. The company acquired Yoplait in July for $1.15 billion from a French investment firm and a dairy group. General Mills said the Yoplait deal added one-third of the 9% revenue growth.

Sales across most of General Mills' segments surged largely because of new product introductions. Cereal sales increased with contributions from brands such as Chex and Cinnamon Toast Crunch. New products, including Cinnamon Burst Cheerios, Cocoa Puffs Brownie Crunch, and Fiber One 80-calorie cereal, also contributed to results. Snacks sales surged 17% driven by Nature Valley and Fiber One snack bars sales. Sales for the baking products division increased 5%, with Pillsbury sales gaining 4%.

The meal segment, however, showcased disappointing sales with a decline of 4% due to lower shipment volumes for dinner mixes, canned vegetables, and soup. Sales overseas posted strong numbers with revenue up 30% to $856 million. This included Yoplait international results.

Bitter hurdles
General Mills, like its competitors ConAgra (NYS: CAG) , Hain Celestial (NAS: HAIN) , and Kraft Foods (NYS: KFT) , has raised prices to offset higher input costs. However, in the backdrop of an uncertain economy bringing down consumer spending, the company needs to weigh in its price hikes. Consumer spending on nondurables was down 5.5% in June. So growth in the U.S. market could be a challenge for the food majors.

Major companies have been milking emerging markets for greater profits. Net sales for General Mills' consolidated international businesses surged 30% to $856 million, with 15% growth in the Asia-Pacific region. So this is one lucrative growth option, though only 20% of General Mills revenue comes from abroad, so if they want to capitalize on this growth they'll have to revamp their focus overseas to see meaningful change.

To attract more and more customers, the company has also increased its advertising and media expenses by 6% and 9% in U.S. and international markets, respectively.

Foolish bottom line
Rise in input costs is the dominant reason behind the decrease in profit. General Mills' top line has grown, and it is rightly putting extra focus on advertising both domestically and abroad at this critical time.

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Abantika Chatterjee does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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