General Mills reports lackluster North America retail sales on its second quarter results

U.S. sales of General Mills' cereal and snacks, two of its most important categories, faltered in its most recent quarter as the company failed to offer enough discounts and end-of-aisle promotions to hit targets.

The Golden Valley-based food manufacturer continues to struggle in its North America retail segment, which accounts for more than 60 percent of its revenue, as it fights for growth at a time of splintering food preferences among U.S. consumers.

And while the maker of Cheerios, Nature Valley and Old El Paso products saw its second-quarter profit fall more than 20 percent from a year ago to $343 million, its earnings per share of 85 cents beat Wall Street expectations by 4 cents. Investors were pleased with the better-than-expected results, sending General Mills' stock up 5 percent in trading Wednesday.

Balancing pricing, promotions and marketing is a tricky game that highlights the challenges Big Brand food manufacturers face as consumers seek foods that are new, promote a sense of health and wellness or are tailored to their lifestyle and dietary needs.

General Mills' cereals sold at full price, such as its new Cheerios Oat Crunch, or top performers such as Trix and Lucky Charms, produced solid quarterly sales, said Jeff Harmening, chief executive of General Mills. The company's promotional display sales, though, dropped 7 percent.

"It was OK, but it wasn't as good as it could've been," Harmening told the Star Tribune. "We were busy changing box sizes on our flakes cereals. … It wasn't a matter of distraction but prioritization."

The company increased its promotions mid-quarter and started to see sales improve in November, something it plans to continue through the back half of the year. Overall sales in the North America retail segment were down 3 percent for the quarter ending Nov. 25, with cereal and snacks down 5 and 4 percent, respectively.

In its snack business, the company is seeing two divergent trend lines: International snack bar sales are up 39 percent for the first half of the year, while U.S. snack bars were down 5 percent, falling short of leadership's expectations, Harmening said. The U.S. declines are due almost entirely to plummeting sales of Fiber One bars.

"Fiber One is the one where we, frankly, kind of lost our way for a bit," Harmening said. "Nature Valley is fine, but not better than fine."

Nature Valley failed to develop innovative new products this year and also stumbled on its in-store promotions, he said. "On Nature Valley, we can do better."

Larabar and Epic Provisions' snack bars are both growing by double digits.

General Mills reported quarterly revenue of $4.4 billion, up 5 percent from last year thanks to the inclusion of Blue Buffalo Pet Products, but slightly lower than analysts expected.

General Mills' $8 billion Blue Buffalo acquisition catapulted the packaged-food giant into the pet retail segment earlier this year, an integration analysts are watching closely and one that is complicating year-over-year comparability. For the quarter, Blue Buffalo sales were lower than forecast, but Harmening is bullish on the brand's growth in the second half of the year, with national distribution expected to double as General Mills focuses on getting the products into mainstream retailers, such as grocery, drugstores and general big-box chains.

"Our household penetration is up 20 percent as opposed to retail sales up 9 percent [for the first half of the year]," Harmening said. "The brand continues to grow and gain new consumers."

The company plans to push hard on Blue Buffalo's wet dog food and treats offerings. "Treats is snacking," Harmening said, and the humanization of pet food is bringing similar trends to what has occurred in human food. "We think we understand these trends."

General Mills, now at the halfway point of its fiscal year that starts and ends in late May, reaffirmed its full-year guidance.

"I'm pleased that our results through six months keep us on track to deliver our full-year targets," Harmening said.

Company executives told investors this summer it is looking to sell brands that aren't performing as well or are outside its focus areas. General Mills still hopes to shed about 5 percent of its total sales through divestitures, said chief financial officer Don Mulligan, but "no update until we're ready to pull the trigger on something."

Kristen Leigh Painter • 612-673-4767