Inflation Is a Hot Topic This Earning Season. What CEOs Are Saying. - Barron's

Some supermarkets still require shoppers to wear masks.

DANIEL LEAL-OLIVAS/AFP via Getty Images

We’re about three-quarters of the way through second-quarter earnings season, and there’s been no hotter topic on earnings calls than inflation. Rising costs and their effects on prices and profit margins have come up on more than half of S&P 500 earnings calls in the past three weeks, based on a search of Sentieo transcripts. Corporate executives have been sharing what they’re seeing on the ground at their businesses in an inflationary environment—and what they expect will come next.

Second-quarter S&P 500 earnings per share are on track to be up 83% from a year ago. Companies have been beating by 16% on average, per data from Credit Suisse ‘s chief U.S. equity strategist Jonathan Golub. There’s a lot of good news for CEOs and CFOs to share.

But managements’ outlooks have been more mixed. Executives at Sherwin-Williams (SHW) and Genuine Parts (GPC) said the companies have managed to absorb higher input costs so far this year, but they expect that to become more challenging. Chipotle Mexican Grill (CMG) and Waste Management (WM) are increasing wages to attract and retain employees. Consumer products seller Conagra Brands (CAG) and potato giant Lamb Weston (LW) warned investors that earnings will be pressured by inflation in the coming quarters. Others, like Travelers Cos. (TRV) or Newmont (NEM), see potential benefits to their businesses thanks to faster global inflation.

Here are a few highlights from recent earnings calls on the topic of inflation:

Chipotle Mexican Grill CEO Brian R. Niccol, July 20:

There’s so much going on right now with inflation and the question about whether inflation is transitory or permanent. We’ve got labor inflation. We took a big move there. We’ll see how that shakes out…. Let’s see how the menu price [increase] continues to be accepted by customers. So far, really, really good, really seeing no resistance whatsoever…. We’ve got a lot of upward mobility on our margins. We have pricing power. Now it’s just a matter of how and when we decide to use that pricing power, to either protect margins or to invest in our people like we just did with the wages.

Sherwin-Williams SVP Jim Jaye, July 27:

When we look at the basket, what we saw in the second quarter was the inflation being driven by higher costs for monomers, resins, solvents, and packaging materials.…We did guide here that we think the third quarter is going to be the highest year-over-year raw material inflation and only modest relief maybe in the fourth quarter.

Conagra Brands CEO Sean Connolly, July 13:

We began implementing pricing actions on some of our products in the [fiscal] fourth quarter related to the initial inflation we experienced.…We expect the negative impact of the cost inflation to hit our financials before the beneficial impact of our responsive actions, including our pricing. This timing mismatch is expected to be particularly impactful in H1 and more specifically in Q1. The resulting pressure on our first half margins impact our full year profit.

Newmont CEO Tom Palmer, July 22:

50% of our cost is in labor, and we are seeing both in Canada and Australia quite hot labor markets for mining. There has been an uptick certainly in both those countries over the course of this year, and we expect to see that flow through at least all of next year. And then materials and energy make up the next 40% to 45% [of costs….] And we are seeing, in terms of steel and fuel and oils…the order of about 5%. We’re not seeing it structurally. We are seeing it as cyclical…. And, of course, [inflation] does set us up nicely for some pretty positive gold price outlook.

Genuine Parts CFO Carol Yancey, July 22:

As we look at our inflation, it is a bit unique and unprecedented as it relates to the U.S. automotive industry. We haven’t seen this kind of [price increase] activity for a decade. It’s sort of similar to tariffs at the pace that they’re coming. It is driven by a combination of raw materials, freight, and labor.

Lamb Weston Holdings CEO Tom Werner, July 27:

The lingering effects of the pandemic and the sharp recovery of the broader economy in the U.S. have disrupted supply chain operations across all industries, including ours, which has resulted in increased costs. As a result, we expect input cost inflation, especially for edible oils, packaging, and transportation, to be a significant headwind for fiscal 2022. Our goal is to offset inflation using a combination of levers, including pricing. To that end, we just began implementing broad-based price increases in our food service and retail segments and don’t expect to see the most of their benefit until our fiscal third quarter.

Waste Management COO John Morris, July 27:

It’s no surprise to anyone who follows economic indicators that most businesses are experiencing inflation in their costs throughout 2021, and our business is no exception, particularly with regard to labor. We expect to overcome these pressures by increasing operating efficiencies and executing on our disciplined pricing programs. There’s no silver bullet when it comes to attracting and retaining talent, and we are using a multifaceted approach that includes addressing wages, offering flexible schedules, and broadening benefits.

Travelers Cos. CFO Daniel Frey, July 20:

It’s important to remember that we have some natural hedges in our business that mitigate the effects of inflation. First, higher inflation is often associated with stronger economic activity as well as higher wages and asset values, all of which contribute to higher insured exposures. And higher exposure contributes to improved margins. Second, although we’re not seeing it at the moment, to the extent interest rates are correlated to inflation, we would benefit from higher returns in our investment portfolio as inflation increases.

Write to Nicholas Jasinski at Nicholas.Jasinski@barrons.com.

Adblock test (Why?)

Inflation Is a Hot Topic This Earning Season. What CEOs Are Saying. - Barron's
Read More