General Mills, Inc. (NYSE: GIS) stock dropped nearly 9 percent Wednesday morning after the company slashed its earnings guidance and said rising commodity prices will take a bite out of its profits. The guidance cut took the market by surprise, but further downside for the stock may be limited for now.
General Mills reported fiscal third quarter adjusted earnings per share of 79 cents on revenue of $3.88 billion. Both numbers beat consensus analyst expectations of 78 cents and $3.78 billion, respectively.
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However, investors were focused on the company’s guidance cut for fiscal 2018. General Mills said full-year EPS will grow between zero and 1 percent, down from a previous range of 3 to 4 percent growth.
Net income on the quarter more than doubled to $941.4 million, thanks to a one-time tax cut boost of $504 million. Net sales were up 2 percent on the quarter, but gross margins declined 2.2 percent to 32.3 percent.
General Mills, which owns popular brands such as Cheerios, Haagen-Daz and Betty Crocker, blamed its guidance cut on rising commodity prices.
“Like the broader industry, we’re seeing sharp increases in input costs, including inflation in freight and commodities,” General Mills CEO Jeff Harmening says in a statement. “We’ve taken actions to improve profitability in the near term, and we’ve launched initiatives that will reduce our long-term cost structure. ”
General Mills says it plans to mitigate rising costs by exploring different modes of transportation, streamlining its distribution network, optimizing its administrative structure and implementing other cost-saving initiatives.
Bank of America analyst Bryan Spillane is one of many analysts disappointed by the General Mills report.
“While the guide down is not completely unexpected, we think the magnitude may be a surprise to the market,” Spillane says.
But after nearly a 10 percent sell-off, Spillane says the worst of the selling pressure may be over in the near term.
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“While management has a realistic assessment of the marketplace and will focus on improving sales in fiscal 2018, we believe the market has priced in industry challenges and GIS’ steps to address them,” he says.
Bank of America has a “neutral” rating and $57 price target for GIS stock.
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Inflation Eats Into General Mills, Inc. (GIS) Profits originally appeared on usnews.com
