Nestlé profit margin forecast cut sends stock down 7%

Nestlé reported H1 operating profit of CHF7.1bn, down 2.8%, as coffee and cocoa costs squeezed margins and forced a guidance cut.

"The RIG-led growth strategy is delivering, with organic growth of 3.7% and RIG of 1.8% in Q2, making steady progress toward our medium-term guidance," Chief Executive Officer Philipp Navratil said.

The maker of KitKat and Nescafé posted net profit of CHF3.5bn, down 31.4% from CHF5.1bn a year earlier. Organic growth rose to 3.6% from 2.9%, with real internal growth — a measure of volume-driven sales — climbing to 1.5% from 0.2%. Pricing contributed 2.1 percentage points to growth, down from 2.7 points a year ago, as the company shifted toward volume-led expansion.

The guidance downgrade sent shares down 7% in Zurich trading, the biggest single-day drop since 2020. Nestlé now expects second-half margins to be broadly in line with the first half, dashing hopes of improvement after a string of cost-saving initiatives.

The company's underlying trading operating profit margin improved to 16.4% from 15.7% in the second half of last year but remained 10 basis points below the 16.5% reported in H1 2025. Free cash flow rose to CHF3.4bn, with Fuel for Growth cost savings reaching CHF1.7bn, on track for the CHF2bn full-year target.

Emerging markets delivered organic growth of 7.1%, while developed markets grew 2.3%. Coffee led category performance with 7.5% organic growth, followed by Food & Snacks at 3.7% and Petcare at 2.7%. Nutrition was the only category to decline, falling 1.2% as the infant formula recall continued to weigh on results.

Nestlé also announced a 50:50 joint venture with Platinum Equity for its waters and premium beverages business, valued at €4.9bn. The deal, named Peranel, will generate net cash proceeds of about €3bn for Nestlé in the first half of 2027. The company classified its mainstream vitamins and ice cream divisions as assets held for sale, showing progress in portfolio reshaping.

The guidance revision reflects persistent commodity inflation in coffee and cocoa, which Nestlé said also weighed on margins alongside higher marketing spending and the infant formula recall. The company maintained its full-year outlook for 3% to 4% organic growth and expects free cash flow to exceed CHF9bn.

"The volume numbers were not good enough given the run-up in the stock," Barclays analyst Warren Ackerman said.

The margin warning from a bellwether consumer company suggests cost pressures are spreading across the packaged food sector. Investors will watch Nestlé's Q3 trading update for signs of whether commodity costs have peaked and whether volume growth can accelerate enough to offset margin compression.

This article is for informational purposes only and does not constitute investment advice.