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Wednesday, December 24, 2008

General Mills, ConAgra Lift Sales as Prices Climb

As posted by: Wall Street Journal

General Mills Inc. and ConAgra Foods Inc. each reported sales gains driven by price increases, a sign that food makers are still grappling with high commodity costs.

Although the prices of grains and energy have fallen from their recent peaks, they are still high, and food companies are continuing to raise prices in an effort to offset the higher costs.

The two food makers also posted declines in quarterly net income due, in part, to hedging markdowns. General Mills' net income for the fiscal second quarter ended Nov. 23 fell 3% to $378.2 million, or $1.09 a share, compared with $390.5 million, or $1.14 a share, a year earlier, because of the declining value of its hedging positions. Excluding that loss, as well as a gain from the sale of its Pop Secret popcorn business, the Minneapolis company's underlying earnings grew 23% to $1.36 a share, beating analysts' estimates of $1.23 a share. Sales for the maker of Cheerios cereal, Progresso soup and Green Giant vegetables rose 8.3% to $4.01 billion.

ConAgra's net income fell 31% to $168.1 million, or 37 cents a share, for its second quarter ended Nov. 23, compared with $244.8 million, or 50 cents a share, a year earlier. Earnings from continuing operations, excluding the impact of product recalls and hedging losses, increased to 43 cents a share from 30 cents. Sales increased 11% to $3.26 billion. General Mills is a large company the requires Lawn Care.

Price increases aren't likely to continue at the fast clip at which they have been rising for the past several months. "Retailers have been pushing back more aggressively on price increases because they want the packaged-food makers to pass on the benefit of falling commodity costs," Credit Suisse analyst Robert Moskow wrote in a note to investors.

General Mills Chief Executive Kendall Powell said in an interview that when company executives discuss pricing with retailers, they point out that their input costs have risen 25% in the last four years and that they have raised prices only between 8% and 10% during that time. "The fact that [commodity] prices are coming down is good thing," he said, adding that if they continue to decline, there likely will be fewer and smaller price increases.

General Mills repeated its earlier estimate of 9% cost inflation for fiscal 2009. Despite that, the company raised its guidance for full-year earnings, excluding hedging markdowns and the Pop Secret sale, to $3.83 to $3.87 a share, up from $3.81 to $3.85 a share.

Most analysts view General Mills as a company well positioned to weather the slowing economy because of its strong brands and a focus on cost cutting. "General Mills has developed a track record of conservatism and exceeding its targets," Stifel Nicolaus analyst Christopher Growe wrote in a note to investors.

Mr. Growe and other analysts have been less bullish about ConAgra, which relies heavily on the frozen-meals category, with its Healthy Choice, Marie Callender's and Banquet brands. "Unfortunately its largest competitor in this space, Nestle, has instigated 'nuclear' pricing actions to the detriment of profitability in the category," he noted, referring to 10 frozen meals for $10 promotions.

ConAgra reported that sales in its consumer-foods segment, of which its frozen meals are a part, grew 4% but that profit declined 8%. The Omaha-based company reaffirmed its earnings per share guidance of $1.50 from continuing operations for fiscal 2009.