General Mills Inc. said Wednesday it expects commodities inflation to accelerate and, in turn, the maker of Cheerios cereal and Progresso soups will continue to raise its own prices to keep pace.
Its shares fell about 2 percent in morning trading.
General Mills, which reported a higher quarterly profit due in large part to a surge in international sales that offset a drop in U.S. cereal buying, was being squeezed by higher costs for ingredients such as grains, meat and dairy.
General Mills expects inflation on such items to be even higher in the fiscal year starting in late May than the 4 percent to 5 percent rise it has forecast for the current fiscal year.
The company said it had little choice but to pass those costs on to stores that sell its products, and by extension, to consumers.
"We need some list pricing (increases) and I think that our retail partners understand that," Chief Executive Ken Powell said on a conference call, citing the "magnitude" of commodity and energy inflation.
Still, analysts said the company has been one of the best in the industry at coping with rising commodity costs by steadfastly reducing expenses and introducing new products that command a higher price.
"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 said.
Most companies are raising prices to counter some of the inflation, but that could hurt revenue if cost-conscious shoppers turn to cheaper brands.
Net income in the third quarter that ended Feb. 27, was $392.1 million, or 59 cents per share, compared with $332.5 million, or 48 cents per share, a year earlier.
Excluding the effect of mark-to-market on its commodity hedging positions, General Mills earned 56 cents, in line with Wall Street estimates, according to Thomson Reuters I/B/E/S.
Overall sales during the third quarter rose 1.6 percent to $3.65 billion, just below the $3.69 billion Wall Street analysts were forecasting.
Its shares were down 80 cents, or 2.1 percent, at $36.11 in late morning New York Stock Exchange trading.
DISAPPOINTING U.S. SALES
Its sales in U.S. stores, which account for nearly 70 percent of revenue, were down 1 percent as cereal purchases fell 6 percent, although General Mills sold roughly the same amount of food over all.
Stifel Nicolaus analyst Chris Growe called U.S. retail sales "surprisingly" soft in a research note, and pointed to promotions that led to a 1 percent drop in prices in that segment.
Profits from U.S. retail sales fell 1.4 percent.
In contrast, General Mills saw an 8 percent sales gain in international markets, including Europe, Canada and Asia, helped by Haagen-Dazs ice cream and Nature Valley nutrition bars. Profit from those sales, which makes up nearly one-fifth of total revenue, more than tripled to $68.8 million.
General Mills earlier this month said it was in exclusive talks to pay $1.1 billion for a controlling stake in Yoplait, the world's second-largest yogurt brand after Danone, whose U.S. distribution rights it has held since 1977.
Powell said he expected the deal to close soon and would likely give an update in the first quarter of fiscal 2012. The transaction could face resistance from regulators in France, where Yoplait is based.
The company stood by its fiscal 2011 forecast that was given last month of adjusted earnings of $2.46 to $2.48 per share on net sales growth at a low single-digit percentage rate.
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