General Mills sees tighter year ahead

General Mills Inc. on Wednesday showed how soaring commodity prices are battering the food industry: Its input costs are expected to double over the next 12 months to levels not seen in years, forcing the big foodmaker to cut its profit outlook.

Still, Golden Valley-based General Mills posted a 55 percent increase in per-share profits during its most recent quarter, largely by successfully pushing its own price increases down to retailers and ultimately consumers -- meeting Wall Street's earnings expectations in the process.

The maker of Cheerios, Green Giant vegetables and Betty Crocker cake mixes reported fourth-quarter profits of $320 million, or 48 cents per share, up from 41 cents a year ago. Excluding one-time costs, fourth-quarter earnings were 52 cents per share, in line with stock analysts' forecasts.

Fourth-quarter sales were $3.6 billion, up 3 percent from a year ago, though a tad below analysts' forecasts.

"I think this quarter reflects that they are not immune to rampant cost inflation and intense competitive pressures," said Erin Lash, a stock analyst at Morningstar Inc. in Chicago. But with General Mills' strong brands, "they will continue to operate well in this environment."

For its fiscal year 2011, which ended May 29, General Mills had cost inflation expectations of 4 to 5 percent, a fairly typical amount. But for fiscal 2012, General Mills said it's budgeting for a 10 percent to 11 percent rise in input costs.

"This would be the highest we've seen in a long while," General Mills Chief Executive Ken Powell said in an interview with the Star Tribune.

The expected inflation hike, which will hit hardest in General Mills' current quarter, was higher than some on Wall Street expected. Many General Mills watchers were looking more for an inflation forecast in the 7 percent to 8 percent range, said Jack Russo, a stock analyst at Edward Jones & Co in St. Louis.

Factoring in escalating input costs, General Mills issued fiscal 2012 earnings guidance of $2.60 per share to $2.62 per share, at least 6 cents below what analysts on average had expected. Despite that bad news, General Mills stock didn't get hammered. Shares rose to $37.38, up 17 cents or 0.5 percent.

Russo said that may be partly because the stock market generally was up Wednesday, and General Mills' stock is currently relatively cheap. It's up 5.5 percent so far this year, compared with a 10 percent increase in the Standard & Poor's 500 packaged foods index.

Also, analysts said that General Mills price inflation forecast is conservative; if it's inaccurate, it will err on the side of caution. And despite all the pressures facing the company, General Mills still managed to grow its gross profit margin, a gauge to which analysts pay close attention.

Powell said General Mills will largely make up for its input cost increases through productivity improvements. New products should help, too, to boost sales and profits.

Russo said he expects General Mills to make up some of its own cost hikes with more downstream price increases, though Powell said "our price increases are pretty much through."

In its fiscal 2011, General Mills instituted mid-single-digit percentage price increases across the majority of its portfolio, mostly in the second half of the year.

The company's fourth-quarter sales and profit increases -- as measured in dollars -- stemmed largely from price increases. But sales volume as measured in pounds was down 4 percent, a reflection at least partly of skittish consumers' reaction to higher prices.

"Higher prices are weighing on an already-fragile consumer," said Morningstar's Lash.