Coffee and cocoa costs weigh heavily! Nestlé lowers profit margin forecast, stock price plunges with largest drop since 2020

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High coffee and cocoa prices are eroding Nestlé's profitability.

The Swiss food giant lowered its profit margin forecast for the second half on Thursday, and, combined with sales growth falling short of some investors' expectations, its share price plunged nearly 7% in a single day, marking the biggest single-day drop since 2020.

Nestlé stated that rising coffee and cocoa raw material costs dragged down its operating profit margin by 0.1 percentage points year-on-year to 16.4% in the first half of this year, and operating profit fell 2.8% to 7.1 billion Swiss francs (about $8.7 billion). The company immediately revised its second half profit margin guidance from "improved compared to the first half" to "roughly in line with the first half," missing market expectations.

This performance shock comes at a key juncture for Nestlé's new management team as they push for comprehensive transformation. Newly-appointed CEO Philipp Navratil and Chairman Pablo Isla—who previously led Inditex—are striving to streamline the group's complex organizational structure and divest certain businesses. The share price had risen ahead of the earnings report due to market optimism, but the disappointing results erased all those gains.

Sales growth misses expectations, pressure from multiple cost sources

Nestlé's sales growth in the second quarter was the main disappointment in this earnings report. The market had generally expected sales growth of 2%, but the actual number announced was 1.8%. While this met analyst consensus, it was lower than some investors' higher expectations.

Barclays analyst Warren Ackerman said, "Considering the previous share price increase, this sales figure is not good enough."

In addition to raw material costs, Nestlé faces multiple additional pressures. The company noted that its operating profit margin was also affected by increased marketing expenses, tariff impacts, and this year's global infant formula recall, which involved products potentially contaminated with cereulide—a toxin that can cause nausea and vomiting.

Revenue beats expectations, price increases support topline growth

Despite pressure on profit margins, Nestlé's second-quarter revenue still exceeded expectations. Sales grew 3.7% during the period, with price increases contributing 1.9 percentage points, partially offsetting the impact of rising costs.

However, analysts' concerns about profit margins overshadowed the revenue highlights. Bernstein analyst Callum Elliott noted that the downgrade of the second half profit margin guidance "significantly diminished Nestlé's earnings report."

Water business joint venture brings in private capital

Along with the earnings report, Nestlé announced the formation of a multibillion-euro joint venture with private equity firm Platinum Equity for its water business, a deal that will bring Nestlé 3 billion euros in capital.

The new joint venture, named Peranel, will be held 50% each by both parties and has an overall valuation of 4.9 billion euros. It covers 30 brands sold in 120 countries, including San Pellegrino, Perrier, and Acqua Panna. The deal is seen as part of Nestlé's ongoing asset portfolio optimization and focus on core business strategy.

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