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Msg  80 of 91  at  12/22/2021 1:15:05 PM  by

jerrykrause


Food Companies Are Having Trouble Keeping Up With Inflation; Input costs keep surprising companies like General Mills, causing declining margins

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Food Companies Are Having Trouble Keeping Up With Inflation; Input costs keep surprising companies like General Mills, causing declining margins

 Back, Aaron.Wall Street Journal (Online); New York, N.Y.
 
 

Packaged food makers can't seem to raise prices fast enough.

General Mills on Tuesday reported strong sales but weak margins for its fiscal second quarter ended Nov. 28, causing it to miss estimates on earnings as input costs and supply snarls continued to bite. Its shares were down 4% in morning trading.

The maker of Cheerios, Yoplait and Annie's mac and cheese said organic sales, which strip out acquisitions, divestitures and currency movements, rose an impressive 5% from a year earlier. But that was entirely due to price increases, as underlying volumes were flat compared with a year earlier. Despite the price increases, rising costs caused a steep, four-percentage-point decline in gross margins to 32.5%.

Historically, food companies have been able to weather episodes of inflation after a lag, as price increases take time to catch up to rising costs. Ultimately many come out better positioned as price hikes stick even as commodity prices eventually fall. The problem this time is that inflation is proving to be stronger and longer lasting than many anticipated, not just with respect to food ingredients and packaging materials, but also factors like freight and labor.

The historical pattern should still hold, but the timing of eventual stabilization and recovery keeps getting pushed back, says Barclays analyst Andrew Lazar.

"Every time it kind of resets the clock—many of the companies we cover are now on their second or third round of pricing," Mr. Lazar said.

The entire group of stocks has underperformed as a result. General Mills has actually been one the strongest, with its shares up 15% this year prior to Tuesday's results. But that still trails the S&P 500's gain of nearly 23%. Others haven't fared as well—Campbell Soup is down around 11% this year and Kraft Heinz is up just 2%.

Pressed by analysts on a conference call, General Mills finance chief Kofi Bruce declined to say that gross margins have hit a near-term bottom, suggesting they could continue to fall in the current quarter. But he said that margins should see some sequential improvement the following quarter.

This fits with what many other food companies have told investors to expect: more pressure on margins in the near term, but improvement coming around the middle of next year. That may prove true, unless of course costs keep rising. Investors will likely need to see inflation pressures actually subsiding before jumping back into food stocks.

 


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