General Mills Shocks No One

Back in July, I noted that consumers across the globe were chowing down on the Cheerios, Yoplait, and other brands owned by packaged-foods leader General Mills (NYSE: GIS  ) . Since that time, shares have appreciated a healthy 18%. While future returns look more modest, General Mills' latest quarter shows that the company is well-fortified against potential headwinds.

Net sales for the fiscal 2010 second quarter were up 2% to $4.08 billion, on top of a particularly strong performance in the year-ago period. At 4% sales growth, the U.S. Retail segment contributed ample momentum, while the smaller International segment saw the top line improve on both an as-reported and a constant-currency basis.

It's no surprise that the Bakeries & Foodservice business is still dragging, but its double-digit sales decline was driven more by divested product lines and adjustable pricing than by end-market weakness. And on the flipside, operating profit in that segment jumped 32%.

According to the company, the gain owes to lower input costs and manufacturing efficiencies -- trends that also benefited competitor Kraft (NYSE: KFT  ) last quarter. General Mills' gain also suggests that management has been on the ball over the past years, jettisoning underperforming, lower-margin products.  Looking forward, any sustained uptick in the economy should put this segment back on a growth trajectory.  

Excluding mark-to-market adjustments, companywide gross margin widened by 4.1 percentage points. That, in turn, helped boost the bottom line: Earnings per share, excluding mark-to-market effects, came in at $1.54 -- a 13% year-over-year gain.

Of course, it's easy to bank a few extra greenbacks when commodity costs are cooperating. Yet operations also benefitted from internal productivity initiatives and a keen focus on product mix, earning management a few bites of one of the company's soon-to-hit-the-shelves dark chocolate granola bars.

Stepping aside from the usual numbers for a moment, I'm beginning to realize that one of General Mills' real gems is its strong relationship with retailers. Management told conference-call listeners that retailers, rather than demanding price markdowns, continue to rely on General Mills' established and new products to drive store profit.

And that sort of successful partnering shows up in the hard data: For the 52 weeks ended Nov. 28th, General Mills posted distribution growth of 1.8%, far outpacing the loss suffered by the overall industry. In non-measured channels, which include retailers Wal-Mart Stores (NYSE: WMT  ) , CVS Caremark (NYSE: CVS  ) , and Costco (NYSE: COST  ) , and deep discounters such as Dollar General (NYSE: DG  ) and Family Dollar (NYSE: FDO  ) , distribution has increased at an even faster rate.

For shareholders, though, the real treat may be twofold. First, management announced a dividend increase. Second, it boosted fiscal 2010 EPS guidance from a previous range of $4.40-$4.45 to $4.52-$4.57, excluding mark-to-market impacts. The revised guidance represents 14%-15% annual growth.

While General Mills shares still trade at a reasonable valuation, future quarters may not stack up. Management recognizes that inflation is likely to kick up in fiscal 2011, and while the company has confidence that gross margins will "continue to hold and expand slightly," that's not the same as the recent growth of 4 percentage points.

Higher sales and profit, then, will largely depend on volume and pricing. In this regard, I expect the company to outperform peers but perhaps not its own recent history.

Grab a spoonful of related Foolishness:

Costco is a Motley Fool Stock Advisor recommendation. Costco and Wal-Mart are Motley Fool Inside Value recommendations. The Fool owns shares of Costco. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak doesn't own shares of any company mentioned in this article. The Fool has a low-sugar, high-fiber, whole-grain disclosure policy that stays crispy in milk.


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