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Input Cost Inflation Turns Things Sour for These Food Stocks

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Companies in the food space are grappling with cost inflation to a great extent – particularly pertaining to inputs. Inflationary pressure is affecting companies at all ends – be it ingredients or commodities; packaging; freight and transport; as well as labor. To top it, costs associated with COVID-19 as well as higher consumer marketing and innovation costs have been eating into margins of a number of food players. For now, input cost inflation tops the list of concerns for companies in the food industry. In fact, a vast number of players in their last earnings call cautioned about inflated cost scenario in the near term.

A Closer Look at Input Cost Inflation

Costs of certain key ingredients such as edible oils, proteins, soybean, flour, vegetables, dairy items, egg and animal feed among others have been rising over the past few months. Consequently, food companies are bearing the brunt of the increased cost of ingredients. These include ready-to-eat cereal and convenience foods company Kellogg Company (K - Free Report) , packaged bakery products producer and marketer Flowers Foods, Inc. (FLO - Free Report) , frozen potato products company Lamb Weston Holdings, Inc. (LW - Free Report) , and manufacturer, marketer, and distributor of spices, seasoning mixes, condiments, and other flavorful products McCormick & Company, Incorporated (MKC - Free Report) .

Apart from agricultural ingredients, input costs have been getting a major upward push from packaging costs, which are likely to remain high. This can be accounted to higher cost of materials like cardboard, aluminum and resin, to name a few. Additionally, companies are incurring increased cost of labor and transport – stemming from a tight labor market as well as supply-chain bottlenecks. A number of food companies expect the pandemic-included supply-chain volatility to linger for a while.

Clearly, input cost inflation has turned things sour for several companies in the Zacks Food – Miscellaneous industry, which is currently ranked #177 and is placed among the bottom 30% of more than 250 Zacks industries.

Will Pricing Efforts Really Help?

The looming cost pressure has prompted food companies to undertake aggressive pricing actions. Passing on the elevated input cost pressure to consumers by raising product prices is quite common among companies looking to protect margins. Apart from this, many companies in the food space are focused on undertaking productivity, saving and revenue management initiatives to mitigate the cost challenges.

While most companies spoke about resorting to stringent pricing policies in their last earnings call, the benefits from these actions are likely to take time to realize. In fact, several companies particularly stated that they don’t expect cost headwinds to be fully offset by their pricing initiatives in the near term. Consequently, a chunk of companies included cost inflation in their bottom-line guidance for the current fiscal year. A lot of them also trimmed their views as they anticipate cost inflation to continue playing spoilsport in the near term.

 

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Food Stocks Battered by Cost Inflation

Conagra Brands, Inc. (CAG - Free Report) lowered its adjusted operating margin and earnings guidance for fiscal 2022, when it reported fourth-quarter fiscal 2021 results. Adjusted operating margin in fiscal 2022 is now anticipated to be nearly 16% and adjusted earnings per share (EPS) is likely to be about $2.50, down from adjusted operating margin of 18-19% and adjusted EPS of $2.63-$2.73 expected earlier. Increased cost inflation prompted this consumer packaged goods food company to trim its guidance. Management expects cost inflation of nearly 9% in fiscal 2022. Although Conagra is focused on undertaking relevant saving and pricing efforts to combat this inflation, the timing and gains from these initiatives are likely to be more skewed toward the second half of fiscal 2022. These actions are unlikely to completely offset input cost woes in fiscal 2022. The first quarter of fiscal 2022 is, in fact, likely to be the lowest-margin quarter in the fiscal. Shares of this Zacks Rank #3 (Hold) company have dropped 5.1% in the past three months compared with the industry’s decline of 5.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks #3 Ranked Kellogg is encountering disruptions related to a tight supply of materials, freight and labor as well as the associated cost inflation. Apart from this, costs related to COVID-19 and mix shift toward emerging markets weighed on its second-quarter 2021 gross margin. Management on its earnings call stated that it expects industry-wide supply-chain headwinds as well as elevated cost inflation in the second half of 2021. It expects gross margin to be more under pressure in the second half of 2021 than the first due to the prevailing operating and cost landscape. Kellogg expects gross margin in 2021 to lag the 2019 levels. Despite raising its organic sales guidance, management reiterated the operating profit and bottom-line guidance for 2021. Adjusted operating profit is still expected to decline roughly 1-2% at cc. Adjusted EPS (at cc) is envisioned in the range of down 2% to up 1%. Shares of Kellogg climbed a marginal 0.6% over the past three months.

The J. M. Smucker Company (SJM - Free Report) announced a guidance cut for fiscal 2022 when it released first-quarter results. This branded food and beverage company is encountering key commodity cost inflation along with supply-chain volatility surrounding the availability of labor and transportation. The J.M. Smucker, on its first-quarter earnings call, stated that it expects to encounter escalated raw material and logistic costs. Management expects supply-chain disruptions and cost inflation to persist through the rest of fiscal 2022. Cost inflation is now expected to have a high-single digit impact on cost of goods sold. For fiscal 2022, management now expects gross profit margin to be 36%, down from 37-37.5% expected earlier. Adjusted EPS for fiscal 2022 is now envisioned in the range of $8.25-$8.65, down from $8.70-$9.10 projected before. Owing to cost inflation and the timing of pricing actions, management expects EPS to decline in the second and third quarter of fiscal 2022. The Zacks Rank #4 (Sell) stock has lost 5.5% in the past three months.

TreeHouse Foods, Inc. (THS - Free Report) also curtailed its 2021 earnings guidance when it reported second-quarter results. Management, on its earnings call, said that it expects a further increase in commodity, freight, and packaging costs. The manufacturer and distributer of private label packaged foods and beverages predicts additional cost inflation of $40 million in 2021, which is unlikely to be countered by pricing. Adjusted earnings from continuing operations are expected to be $2.00-$2.50 per share for 2021, down from the previously-guided range of $2.80-$3.20 per share. For the third quarter of 2021, management expects adjusted EPS from continuing operations of 45-60 cents. In third-quarter 2020, the metric came in at 71 cents per share. The Zacks Rank #5 (Strong Sell) stock has declined 15.1% over the past three months.