General Mills stock declines on poor earnings news

Stiff competition, frugal consumers, and the high cost of promoting new products have taken a bite out of food industry giant General Mills.

The Golden Valley-based company posted a big drop in earnings in the latest quarter and the stock market responded. Shares of General Mills closed down about 5 percent on Wednesday.

In a conference call with investors General Mills CEO Ken Powell acknowledged that the company is under stress.

"The operating environment in several of our markets has grown more challenging," he said.

Some investors might consider that an understatement given that General Mills' net income plunged 25 percent to $345 million. In the important U.S. market, sales for all products fell 5 percent.

Powell said cereal — a huge business for the company — is a particular problem.

"The U.S. cereal category continues to be challenged with retail sales down 4 percent in the first quarter," he said. "We believe that returning the cereal category to growth will require more product news, better innovation and increased...consumer-directed marketing."

General Mills also is increasing its annual cost-cutting target by $100 million, but company officials declined to say what effect that would have on jobs.

The company's latest results did little to help its standing with Wall Street analysts, more of whom advised investors to hold the stock than buy it, according to data compiled by Bloomberg.

"It was a tough quarter, no doubt about it," said Jack Russo, an analyst for Edward Jones.

Despite the latest results, Russo is not writing off General Mills just yet, saying the company will do well over the long term. He said the company is getting hit by competition from cheaper store brands.

But Russo said shoppers are more of a problem.

"The biggest issue is just the consumer really being very cautious in how and where they spend," Russo said. "That combined with the competition being aggressive in terms of price, new products, marketing [and] advertising. It's very challenging environment in the food industry and probably will be for a while."

Analysts say General Mills and its rivals are all giving price breaks and other promotions to both retailers and consumers. That makes it hard for anyone to make serious gains in sales or profits.

Morningstar analyst Erin Lash said virtually the entire industry has been struggling.

"If General Mills' first-quarter results are any indication, the state of the U.S. package food space is quite bleak," Lash said.

But Lash said one three-month period won't define General Mills, which is sticking with its previous forecast of increased sales and profits for the full fiscal year.

The company introduced 145 new products in the United States in the first quarter.

Many new products are aimed at helping General Mills benefit from consumer interest in natural and organic products. Company officials say sales of organic and natural foods has been growing at a 12 percent annual rate over the last decade.

Last week, the company struck an $820 million deal to buy organic food producer Annie's.

General Mills also is rolling out more convenience foods aimed at time-pressed consumers.

Lash thinks the new products will eventually boost sales — and earnings.

"There [are] several headwinds they're facing," he said. "But ultimately we think their focus on bringing products to market and taking costs out of the business will benefit the business long term."