March 21, 2018 / 11:39 AM / 8 months ago

UPDATE 3-General Mills cuts profit forecast as freight, commodity costs weigh

(Adds CEO, analyst comments; updates shares)

By Richa Naidu and Uday Sampath Kumar

March 21 (Reuters) - Cheerios cereal maker General Mills Inc said a sharper-than-expected increase in freight and commodity costs would hurt full-year profit to a greater degree than it forecast just a month ago, driving its shares down more than 10 percent on Wednesday.

The Minneapolis-based company, which owns the Häagen-Dazs and Betty Crocker brands, said full-year segment operating profit would decline by 5 percent to 6 percent, widely below the decline of as much as 1 percent the company said it was expecting in February.

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.

Chief Executive Jeff Harmening said North American freight prices were near 20-year highs in February and that rising commodities costs, including grains, fruits and nuts, had made matters worse.

Harmening said General Mills was moving urgently to reduce costs, hoping to minimize damage to full-year earnings and protect 2019 profits by improving its distribution network, cutting costs globally and finding ways to eke out better product margins.

“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.

Shares in General Mills were down 9.7 percent in morning trading, leading a 1.4 percent decline in the Dow Jones Titan Food & Beverage index.

TEMPORARY FIX

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

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 if General Mills would be able to pass on higher costs and freight inflation to 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.

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. (Reporting by Richa Naidu in Chicago and Uday Sampath in Bengaluru; Editing by Sai Sachin Ravikumar and Bill Trott)

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