Healthy talk is one thing, but General Mills finds people still want the sweet stuff

For all the talk of consumers wanting more healthful food, it turns out that many General Mills cereal eaters still want the sweet stuff.

U.S. sales of its cereal grew 4 percent in the most recent quarter, the company reported Wednesday, helping the Golden Valley-based food manufacturer expand its profit margin and return considerably more money to shareholders than analysts expected.

Cereal remains the company's single largest category, with household brands such as Cheerios, Trix and Wheaties, and a strong performance there generally bodes well for the company overall.

The segment grew during its third quarter, ended Feb. 24, despite consumer trends — including increasing demand for protein-rich, on-the-go breakfast options — that present long-term challenges for the business.

Executives credited new products such as Cinnamon Toast Crunch Churros and Fruity Lucky Charms for the bump. In cereal, Jeff Harmening, chief executive of General Mills, said, "Our growth is in [the products] that taste really good."

Margins were also helped by trimming supply-chain and administrative costs, adding Blue Buffalo pet foods and raising prices on its products, according to Don Mulligan, chief financial officer for General Mills.

With the quarter's better-than-expected results, executives raised their per-share profit guidance to flat to up 1 percent for the full fiscal year, which ends in May. Previously, they forecast it to be flat to down 3 percent.

Sales were up 8 percent in the latest quarter, largely due to the inclusion of the high-growth Blue Buffalo pet brand. General Mills bought premium pet foodmaker Blue Buffalo last April for $8 billion, the second-largest acquisition in its 153-year history. Not counting acquisitions, General Mills' organic sales rose 1 percent.

"The biggest driver was improvement in our North America retail business," Harmening said, "and the biggest change was cereal, but not to be lost was our meals and baking, like Old El Paso, Totino's and Pillsbury. It was good to see growth in those businesses."

The company needed a good quarter to continue its positive momentum with investors. After taking a beating in 2018, General Mills stock has risen 30 percent after hitting a five-year low in December, besting its packaged-food peers. The stock rose 2.2 percent Wednesday.

Investors are expecting positive returns from the rollout of Blue Buffalo products at Walmart, the nation's largest retailer, this spring.

Alexia Howard, an analyst with Bernstein, called Blue Buffalo's results "muted" in the just-finished quarter. But she added, "Performance is expected to be turbocharged next quarter by the rollout more fully into Walmart stores."

Executives expect Blue Buffalo to deliver a staggering 30 percent spike in retail sales during the fourth quarter.

Blue Buffalo lost distribution in pet-specialty stores such as Petco and PetSmart when it started selling to large general merchandisers such as Target. Those losses are more than offset though by sales growth online and in mainstream mass retailers.

"Certainly our move into the food, drug and mass channel has caused [those retailers] to look at their assortment. That's undeniable," Harmening said. But, he added, General Mills has had to manage this type of situation before when it bought Annie's and started selling the products outside of Whole Foods and other natural-foods retailers.

"We've seen this before and we are confident that because Blue Buffalo is such a good brand, we will be able to find a win-win with these retailers," Harmening said.

Brittany Weissman of Edward Jones believes the Blue Buffalo integration is going as expected. "General Mills continues to make progress improving results, and we believe the recent Blue Buffalo acquisition has the potential to add to growth," she said.

Snack bars and mixes account for more than 14 percent of the company's sales and are seen as growth opportunities as consumers increasingly seek convenience and portability. However, General Mills reported a 5 percent decline in sales of its snack bar products during the quarter.

Two smaller lines of snack products, Larabar and Epic Provisions' bars, were bright spots, growing by high double-digits. But the company is planning changes in its Fiber One products to better respond to today's dieting trends and bolder innovations in its Nature Valley line.

"Nature Valley is doing fine, but they are a great brand [that] we need to be doing better than fine," Harmening said. "Innovation is difficult and sometimes you don't get it right, and we didn't this year."

General Mills posted adjusted earnings per share of 83 cents on $4.2 billion in revenue for the quarter. Analysts expected earnings per share of 69 cents on $4.19 billion in revenue, according to Thomson Reuters.

Investors rewarded the surprise, sending its stock up as much as 6 percent Wednesday before closing up more than 2 percent.

Its quarterly profit of $447 million was down from $941 million, when it experienced a one-time bump from the then-new federal tax law.

"We're pleased with what we've done, but we've got more work to do," Harmening told investors and analysts, "and we're going about the business of doing that."

Kristen Leigh Painter • 612-673-4767