Supply Chain

General Mills Slashes Guidance, Stock Plunges

The cereal maker is now predicting full-year operating profit will fall as much as 6% due to higher-than-expected supply chain costs.
Matthew HellerMarch 21, 2018

General Mills’ third-quarter results beat Wall Street estimates but the cereal maker’s shares fell nearly 9% on Wednesday as it drastically lowered its full-year profit outlook, citing supply chain costs.

Just a month ago, General Mills said full-year operating profit would range between flat or a 1% decline. But in Wednesday’s third-quarter report, it revised that significantly, predicting a decline of between 5% and 6%.

“The change in outlook was driven by higher-than-expected supply chain costs, including freight and logistics, commodities, and other operational costs,” the company explained.

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CEO Jeff Harmening said General Mills was moving urgently to “address this increasingly dynamic cost inflation environment” by, among other things, increasing the number of qualified freight carriers and tightly monitoring spending for the rest of the fiscal year.

“We’ve taken actions to improve profitability in the near term, and we’ve launched initiatives that will reduce our long-term cost structure,” he said in a news release.

As Reuters reports, packaged foods companies “have 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.”

But in trading Wednesday, General Mills shares dropped 8.8% to $45.51, with one analyst expressing incredulity at the revised outlook.

“We are unsure how one of the biggest companies in the world, one with fairly predictable sales, could have a forecasting system with such inaccurate outputs,” J.P.Morgan analyst Ken Goldman said.

For the third quarter, General Mills posted adjusted per-share earnings of 79 cents as sales rose 2% to $3.88 billion. Analysts had predicted earnings of 78 cents per share on revenue of $3.87 billion.

“While I’m pleased that we’re delivering on [sales growth] … I’m disappointed in our results on the bottom line,” Harmening said. “Our third-quarter operating profit fell well short of our expectations, and cost pressures are impacting our full-year outlook.”

The company said freight costs in North America were at a 20-year high in February and food prices were also higher than expected.