UPDATE: General Mills, ConAgra See Double-Digit 2Q Earnings Drop

General Mills Inc. (GIS) and ConAgra Foods Inc. (CAG) are both banking on earnings growth picking up in the second-half of their fiscal years, following muted first-half results with margins down from higher costs and sales volume crimped by rising prices.

Tuesday, the two packaged-food giants both posted double-digit percentage drops in fiscal second-quarter earnings. General Mills earnings fell 28% as higher costs drove down margins, and the company also took charges related to its acquisition of 51% of Yoplait's international business. ConAgra's earnings fell 14.5% with margins also falling and on hedging losses.

Adjusted for one-time items, General Mills' per-share earnings fell short of estimates, while ConAgra beat expectations on strong results in its commercial foods business. Both companies also backed their earnings guidance for the year.

But the companies' U.S. grocery businesses, which account for the majority of sales and profits, both highlighted the key challenge facing packaged-food companies today. With costs up, ConAgra and General Mills are raising prices, but are selling fewer products due to consumers having less money to spend at the grocery store.

ConAgra seemed to blunt the impact slightly better than General Mills. ConAgra's consumer foods business, which includes Banquet frozen meals and Hunt's ketchup, had a 1% fall in volume while prices rose 5%, contributing to a 4% rise in sales for the segment.

Meanwhile, General Mills, which makes Cheerios breakfast cereal and Progresso soups, saw its equivalent case volume down 2% in the second-quarter, where higher prices provided a 10 percentage point boost to sales. Overall, sales for the segment were up 3%.

The food companies are pairing their price increases with increased marketing and a rash of new products to entice shoppers to spend their money, which they hope will pay off in the second half of their fiscal years, when year-over-year comparisons for costs begin to ease slightly. That's a key factor behind the rosier earnings growth expected in the back halves.

While the U.S. consumer-facing businesses struggle, ConAgra and General Mills are finding other avenues for growth. General Mills, having acquired the international Yoplait business in July, is looking at building that business in overseas markets. It's already experiencing robust growth internationally for its other brands, with sales up double-digits in the second quarter.

ConAgra, meanwhile, is hoping to make a bigger splash in the private-label arena, where it sees more growth potential. After failing to acquire Ralcorp Holdings Inc. (RAH), a large private-label concern, ConAgra is hunting for acquisitions in the space. It recently bought a private-label pretzel maker for $300 million.

General Mills, for the quarter ended Nov. 27, reported a profit of $444.8 million, or 67 cents a share, down from $613.9 million, or 92 cents, a year earlier. Excluding items such as the effects of mark-to-market accounting and Yoplait integration costs, earnings were 76 cents a share in both periods. Sales jumped 14% to $4.62 billion.

ConAgra, whose quarter also ended Nov. 27, reported a profit of $171.8 million, or 41 cents a share, down from $200.9 million, or 45 cents a share, a year earlier. Excluding hedging costs and other items, earnings from continuing operations were 47 cents. Revenue increased 8.1% to $3.4 billion.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com

--Tess Stynes and Melodie Warner contributed to this article.

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