General Mills executives suggest spending cuts went too far

General Mills, walking a tightrope between expense control and the necessity to spend on the future, lost balance in the latest quarter as executives on Tuesday suggested that cost-cutting may have hurt sales.

The company reported its profit fell 9 percent and sales fell 7 percent for the September-to-November period, the second quarter in its fiscal year. Executives lowered their outlook and the company's stock fell 2.6 percent, though it is still up about 7 percent in 2016.

The Golden Valley-based food maker extensively cut costs since 2014, responding to pressure on sales as consumers are spending less on processed foods. Investors helped drive the strategic change by urging executives to, as is common with slow-growth companies, deliver value through better profits.

General Mills has made it happen: its operating profit margin this quarter was the second highest of the last 10 quarters, while revenue was only the seventh highest. But sales have also dropped at a high single-digit rate for four straight quarters, faster than when it began cutting costs, leading to worries that General Mills now isn't spending enough to get people to buy its foods.

"It is very clear that taking a very disciplined approach to spending is the right thing to do," Chief Executive Ken Powell said after the results were announced. "But as we look back at the second quarter, we think there are places we cut too far, and we will add back and correct those areas."

Even some analysts sent caution signals that the cost-cutting and investment balance had tipped at General Mills. One asked Powell how important it was for the company to stick to a goal of reaching an operating profit margin of 20 percent in the fiscal year that starts next summer.

And Erin Lash, analyst at Morningstar, wrote in a note after General Mills' results were posted: "We've been saying for quite some time that a pullback in brand spending has artificially inflated profit levels across the industry, including at peers Campbell Soup, Kraft Heinz, and ConAgra Brands, among others, and we viewed recent outsize profit gains as unsustainable."

She said Powell's comments "provided further credence" to the need for General Mills to spend more to promote its brand and products.

General Mills earned $482 million, or 80 cents per share, in the three months ended Nov. 27. Sales amounted to $4.1 billion. In light of a disappointing first half to its 2017 fiscal year, executives said they now expect full-year sales to drop 3 percent to 4 percent.

Its Yoplait yogurt products fell 17 percent in the U.S., the main contributor to a 9 percent drop in U.S. retail sales, which is the company's largest business segment. General Mills is renovating 60 percent of its yogurt portfolio after suffering significant market-share losses to new entrants like Chobani and other Greek-yogurt brands.

But it has yet to benefit from those product changes.

Jeff Harmening, the company's president, said it expects a slight improvement in the second half of this year and "by fiscal [year] 2018, it should get better still." He stressed the importance of increasing its innovation efforts, including promoting new organic yogurt products or reinvented existing ones.

"We have a good pipeline of innovation that we will continue to unveil," Harmening said.

Harmening said he believes General Mills can spend more on marketing innovations such as taking gluten out of many Cheerios varieties and removing of artificial colors and flavors from other cereals.

For several years, Powell said, this leadership team has been monitoring two things he feels are affecting food makers the most: changing consumer attitudes toward food and an increase in activist interest in food and beverage companies. "We are very aware of both of those things," Powell said. "In any era of consolidation, the way to go forward is to be lean and be profitable and to perform. And that's been our focus."

Renewed speculation on Wall Street has recently zeroed in on Mondelez International and General Mills as potential takeover targets of Brazilian private-equity firm 3G Capital, which orchestrated the Kraft Heinz merger, along with Warren Buffett's Berkshire Hathway, nearly two years ago. 3G tends to target companies it feels it can extract more cost savings from and has said it intends to further consolidate the food industry.

To continue operating independently, said General Mills Chief Financial Officer Don Mulligan, what matters is "how we perform for our shareholders."

Kristen Leigh Painter • 612-673-4767