Fincredible MacroTalk July 7: Commodities and Labor Driving Inflation
Comments on inflation from company executives of JPM, GIS, PLAY, DRI, HLT, RRGB, MCK, STZ, PFGC, DAKT, MU, UNF, SCS.
A month ago, the U.S. BLS released their CPI estimate for May, which indicated a YoY inflation rate of 5%. The rise was headlined by a 28.5% increase in energy prices as the economic recovery takes place around the world. Excluding food and energy, prices increased by 3.8% over the past year. The recent inflationary spike has alarmed some investors and sparked a conversation about the persistence of these price increases.
With the June CPI numbers right around the corner, we’ve highlighted some recent quotes from company earnings calls and events regarding inflation expectations. Listening to what the executives of major companies are seeing every day can help analyze inflationary trends.
Most quotes are sourced from Fincredible. If you missed our previous post on inflation and would like to read it, you can access it here.
Consumer Cyclicals
In the consumer cyclical sector, companies are reporting wage and commodity inflation as their biggest cost drivers. However, most of them are still expecting low single digits inflation for the year as commodity prices taper in the back half of the year and labor shortages subside.
“So yes, as you look at inflation, we said commodities is around 2.5% for the full year. But it is -- the front half of the year is somewhere between 3.5% to 4%. And then that is a little bit -- it tapers off a little bit as we go into the back. And as I said in my prepared remarks, Q4 this year was 4.3%, which implies -- which is where we think as we ramp on that next year, we expect Q4 to be more closer to flat. And so that's kind of the cadence. And then about the drivers of commodity inflation, I'd say chicken and seafood are high, and then we're also seeing significant inflation in cooking oil, a little bit in dairy. And I'd say the other thing is packaging. Packaging continues to be -- especially with the resin costs going up, packaging is another factor. So all in all, those are the big drivers of inflation on the commodity side. And on the labor side, overall labor, we expect to be somewhere between 4%, 4.5%. But wage rate itself, we expect that to be around 6%.”
Darden Restaurants Q4 2021 Earnings Call
“So, so far, with the kind of incremental wage inflation that we've seen, most of that is actually due to additional overtime. With lower staffing levels, we are augmenting more with over time than we had in the past. And just from store opening standpoint, of course, when you add California to the mix, that's going to kind of raise our average by itself just internally. But as we kind of get into the second half, I mean, we expect the wage pressure to moderate somewhat as some of these labor shortages ease, which we think we will see that. And I'd say that just for a couple of reasons really. As unemployment benefits start to go away in early September and even earlier in some states that have already pulled back, we think that COVID fears should start to subside with more folks willing to return to work. And then as schools reopen as well, we think there's a few factors out there that, over the course of the next few months, should help the labor shortage situation.”
Dave & Buster's Entertainment Q1 2021 Earnings Call
“In the short term, yes, I did say that, and that is right. I think the input cost inflation on labor broadly to operate, on labor to build, on the input cost because the high level of demand for construction and construction materials, it's definitely having impact on undue deliveries. And that isn't being helped by lack of financing and other things that are converging all at the same time. That will abate, okay. I do think that some of the significant inflationary spikes are transitory, particularly on the -- on all fronts. I think some of the demand for raw materials that are inputs as a result of what's been going on in COVID. I think some of the labor cost inflation will stabilize as you get into the fall, and the other thing that will be happening is prices will adjust. So I'm a big believer in the laws of economics, not to be pedantic, but they're alive and well. And I think that inflationary pressures will subside. If they didn't, pricing will adjust to reflect the new world environment, and we'll chug on.”
Christopher Nassetta, CEO
Hilton Worldwide Holdings Inc at Sanford C Bernstein Strategic Decisions Conference
“We expect low single-digit commodity inflation throughout the remainder of 2021, driven primarily by rising protein prices.
We saw wage inflation between 1% and 1.5% in the first quarter. But we also saw the impact of higher off-premise sales, which carries higher wage rates in the front of house. We do expect wage inflation to increase from that point through the balance of the year, and we expect it to fall somewhere in the low single digits.”
Red Robin Gourmet Burgers Q1 2021 Earnings Call
Consumer Non-Cyclicals
Of the consumer non-cyclical companies, General Mills for example is forecasting 7% inflation, while McCormick is confirming inflation is broad-based. However, Constellation Brands expects the inflationary spike to be temporary.
“There is broad-based inflation that's recognized by everybody. It's not just us that's going up in isolation, full industry is moving.”
McCormick & Company Inc Q2 2021 Earnings Call
“Our outlook as well as some of the external advice we get on this is still that inflation is going to have a bit of a spike, but it's going to be temporary in nature. The question just is like how temporary, right? And it seems as though that kind of blip, it might take a little bit longer to kind of come down from there. And so the things that we're watching mostly right now really are around, as you indicated, logistics and transportation and labor. And those things are somewhat intertwined, if you will. The labor market has made it difficult to get dedicated trucking lines. And so that's becoming more and more competitive. So that's absolutely a concern. We continue to watch aluminum. And then we look at natural gas -- or glass, right, glass because glass is impacted by natural gas. So those are the areas that we're kind of most watchful for as we go through the year.”
Constellation Brands Q1 2022 Earnings Call
“So as we - we give guidance on inflation of about 7%. We would expect our holistic margin management to register about 4 percentage points of cost of goods sold. So that would offset a good portion of the inflation.”
General Mills Inc Q4 2021 Earnings Call
“Nobody likes too strong inflation, but we think it's manageable now. It's definitely volatile. And what we saw a couple of weeks ago isn't what we see this week. And we expect it to be a little bit different next week as well as inflation. It's definitely a dynamic variable that we're all experiencing.”
Jim Hope, CFO
Performance Food Group Co at Jefferies Consumer Conference
Technology
Supply-chain disruptions and the shortage of semiconductors have led to sharp rises in some prices, according to Daktronics. In memory pricing, Micron reported rising prices due to strong demand.
“While optimistic on recovery and growth, we expect headwinds in the availability of material, labor and transport for the foreseeable future. We believe these will create inflationary pressure. Late in our fiscal '21, supply chain disruptions began to emerge as a result of the pandemic, winter weather and the changes in global demand. Specifically, we were impacted by the global shortage of semiconductors and related electronic components, other materials needed for production, shipping container shortages and freight availability. We expect these factors will cause volatility in our revenue cycles and production costs on into FY '22.”
Daktronics Inc Q4 2021 Earnings Call
“So certainly, on a like-for-like basis, pricing increased across the board in the DRAM industry, and again, driven by the strong demand, as I mentioned earlier, pretty much across all of the end markets. So we enjoyed price increases across all end markets. And as we have mentioned, that even in F Q4, we see price increases not just in DRAM, but we also see that in NAND.”
Micron Technology Q3 2021 Earnings Cal
Financials
“But we have a lot of cash and capability, and we're going to be very patient. And we're being patient because I think you have a very good chance of inflation will be more than transitory.”
James Dimon, CEO
JPMorgan Chase & Co at Morgan Stanley US Financials, Payments & Commercial Real Estate Conference
Industrials
Industrials are seeing a rebound in prices that were down during the pandemic, as well as rises in the cost of labor.
“As I'm sure many of you are aware, we are operating in an increasingly inflationary environment. The cost of labor as well as other business inputs are clearly on the rise. In addition, we expect and have begun to experience a rebound of several costs that trended significantly lower during the pandemic such as merchandise, healthcare, energy, travel and others.”
UniFirst Corp Q3 2021 Earnings Call
“Inflation had a modest impact on our gross margins in the first quarter, and we expect the impact to increase more significantly over the next couple of quarters. We're offsetting some of the inflation through ongoing cost reduction initiatives. But when the levels of increase are this high and this broad, we have no choice but to swiftly implement price increases, which we did in April, and we recently announced an additional increase for August. It will take some time for those increases to take full effect, so we expect inflation, net of price increases to be a larger headwind in the second and third quarters. There are some commodities like steel, where prices are expected to retreat from their peaks later this year and we consider that when setting our price increase levels. If these prices do not return to more normal levels, we'll consider future price increases.”
Steelcase Q1 2022 Earnings Call
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