Food & Beverage

General Mills cuts its profit forecast as freight and commodity costs weigh

Key Points
  • Cheerios cereal maker General Mills cut its yearly earnings forecast.
  • The company cited a sharp increase in freight and commodity costs.
  • General Mills shares sank 6 percent in premarket trading on the news.
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Cheerios cereal maker General Mills cut its full-year earnings forecast due to a sharp increase in freight and commodity costs, driving its shares down 9 percent in premarket trading on Wednesday.

The Minneapolis-based company, which owns the Häagen-Dazs and Betty Crocker brands, said it would try to strengthen next year's earnings by improving its distribution network, cutting costs globally and finding ways to eke out better product margins.

General Mills, like other U.S. packaged food companies, has been facing higher transportation costs as railroads and truck fleets have raised prices amid a shortage of drivers, reduced capacity, higher fuel prices and a strengthening U.S. economy.

"Like the broader industry, we're seeing sharp increases in input costs, including inflation in freight and commodities," General Mills Chief Executive Jeff Harmening said in a statement.

Harmening said he was disappointed with third-quarter operating profit and that General Mills was moving urgently to reduce costs, hoping to minimize damage to full-year earnings.

Cost-saving measures include increasing the number of qualified freight carriers, using different modes of transportation and tightly monitoring spending for the rest of the fiscal year, General Mills said.

Cost savings might only be a temporary fix and run out of steam as top-line weakness trickles through, Bernstein analyst Alexia Howard wrote in a note. Howard said she was uncertain that General Mills would be able to pass on higher costs and freight inflation to struggling retailers that are fighting to cut costs themselves.

General Mills, which also makes Yoplait yogurt and Nature Valley granola bars, now expects fiscal 2018 adjusted earnings per share to grow up to 1 percent, compared with a prior forecast for a 3 percent to 4 percent increase.

Net income attributable to General Mills more than doubled to $941.4 million in the third quarter ended Feb. 25, helped by a one-time tax benefit of $504 million from changes in the U.S. tax code.

Excluding one-time items, the company earned 79 cents per share.

Net sales rose 2.3 percent to $3.88 billion.

Analysts had expected third-quarter earnings of 78 cents per share and revenue of $3.78 billion, according to Thomson Reuters I/B/E/S.