GIS General Mills Inc

By Annie Gasparro 

General Mills Inc. will raise prices on some of its packaged foods as higher ingredient and shipping costs cut into profitability.

The maker of Cheerios cereal and Yoplait yogurt said freight costs in North America were near 20-year highs in February while food prices were also higher than expected, prompting the conglomerate to lower its earnings expectations for the year.

"We are seeing an unprecedented rise in logistics costs," Chief Executive Jeff Harmening said in an interview. For food costs, he said, "the inflation is not unprecedented, but we are a quarter late in reacting."

General Mills shares fell more than 9% Wednesday to near a five-year low. The stock is down 25% over the past year while the S&P 500 is up 15%.

Mr. Harmening said he would raise prices on some products and sell some products in smaller packages to make up for the rising costs. He said the company would also tweak the discounts it offers. Analysts questioned whether General Mills can afford to raise prices without losing customers as competition for shelf space at grocery stores intensifies.

"Investors just worry so much that the retail environment is so difficult," Citibank analyst David Driscoll said.

Other big food companies such as Kellogg Co. and Kraft Heinz Co. are also struggling to preserve profits while costs rise and customers drift toward new brands, many of which market their products as more wholesome and healthy. The S&P 500 packaged foods and meats index fell 3% Wednesday.

General Mills' comparable sales rose 1% in the latest quarter, including a bump in the U.S. as more people bought Nature Valley granola bars and new flavors of Cheerios. But the higher costs dragged down General Mills' adjusted operating margin 1.2 percentage points to 15.7%.

For its fiscal year ending in May, General Mills projects adjusted earnings per share will rise by up to 1%, compared to previous guidance for an increase up to 4%.

"We have been very effective in getting closer to the consumer," Chief Financial Officer Don Mulligan said. "We have to be just as close to our cost structure."

General Mills' brands like Cheerios and Progresso soup have been selling faster in stores lately than rival brands -- a sign of progress for a company that hasn't seen that kind of success since 2014, according to J.P. Morgan analyst Ken Goldman.

But General Mills has had to pay more to use third-party manufacturers for some of those products and to secure more shipping capacity at the last minute to keep up with demand. That has dented the company's profit from those higher sales.

"While we expected our new products to be better, but didn't expect them to be this much better," Mr. Harmening said.

Mr. Harmening, who took over as CEO less than a year ago, also said he plans to continue selling off the Minneapolis-based conglomerate's weaker businesses while acquiring new brands with more growth potential.

In February, General Mills agreed to buy pet-food maker Blue Buffalo for $8 billion, giving it a foothold in the premium pet food aisle, where sales are rising faster than for its legacy products like baking mixes. He intends to expand Blue Buffalo to more retail outlets and to expand the brand with new products like treats.

Those acquisitions come alongside divestitures of older brands like the Green Giant frozen and canned vegetable business that General Mills sold to B&G Foods Inc. in 2015. Analysts have speculated that Hamburger Helper or Bisquick could be the next to go.

General Mills wouldn't say which brands it might sell.

Imani Moise contributed to this article.

Write to Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

March 21, 2018 11:52 ET (15:52 GMT)

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