Inflation eats its way into these food makers’ profits

Yahoo Finance’s Brian Sozzi breaks down why packaged food makers are raising product prices.

Video Transcript

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MYLES UDLAND: All right. Well inflation, all the rage right now. And we've seen some interesting commentary from packaged food makers, Brian Sozzi, over the last couple of weeks pointing to how your bill at the grocery store has gotten more expensive and is likely to continue to go up.

BRIAN SOZZI: Well, I see your mention, Myles, of interesting. And I raise you an alarming. And let me start off here with Conagra Brands because the stock got blasted yesterday, about 6% after the company came out with a very, I would say, disappointing earnings report in large part because of the inflation they are seeing in the business.

They also got to even more inflation coming down the pike. So I'm going through the earnings call right now. Coming into its current fiscal year, so over the next 12 months, Conagra was looking for inflation of about 6%. Again, that's pretty high. 6% is no joke. They now told investors to expect 9% inflation over the next 12 months. That differential between 6% and 9%, or 3%, is an extra $255 million in costs for Conagra this year.

So what you have seen, at least in terms of that stock, is a re-rating. Yesterday, the stock was down about 6%, down about almost 1% today as investors adjust for this new inflation reality that will exist, or at least appears for Conagra's standpoint that will exist, even though they will take more price increases in the back half of the year.

Now yesterday, Myles, we talked to PepsiCo's CFO, Hugh Johnston. He is also calling out high levels of inflation. And he's also calling out the fact that they're about to raise prices later this year.

HUGH JOHNSTON: We think of it as more connected to delivering value to consumers. Obviously with cost pressures, it puts that much more pressure on pricing. And, in fact, we will be taking pricing post-Labor Day. You know, it varies by business as to how much is it going to be in Quaker versus FritoLay, versus the beverage business.

What I'd point out is in the second quarter, our pricing was up about 5% in the North America businesses. I think you'll see us take good strong price increases, which are really reflective of the fact that even through the pandemic, we kept investing in the business and building the brands and building capacity to fulfill sales. So we do think our products are worth paying more for. And we think consumers will.

BRIAN SOZZI: In somewhat normal times, Myles, I remember I used to be a consumer/bevrage editor way back when I had a lot more hair. And when you heard these packaged food companies teasing price increases of any kind, usually it would be good for the stocks. But not right now because those price increases, it is unclear if they can fully offset the type of inflation big food is, in fact, seeing.

And I'm looking at the stock prices right now on Yahoo Finance+. Year to date, PepsiCo shares are one of the best performing food or packaged food companies around. But even still, it's gain is 4$. The S&P 500 is up close to 16%. Conagra shares after yesterday's sell off and today's sell off, shares are down 7% in the year. Coca-Cola shares, barely up on the year. General Mills, they reported earnings late in late last month, they are also calling out higher levels of inflation. They're taking price increases. Their stock is barely up for the year, Myles.

MYLES UDLAND: Yeah, I think this whole conversation gets to a really interesting part of specifically why economists and the Fed will justify backing out food prices in that core inflation reading, whether it is core PCE or core CPI, as Tony Dwyre was telling us. Core PCE is what the Fed looks at, so maybe we should pay more attention to that than the CPI data. But we can table that conversation because what you're outlining is that the food companies are raising their prices to protect their margins. They're not benefiting from these price increases, they're trying to offset what's been a really interesting commodity cycle.

We had a multi-year decline in commodities, broadly. And now we are seeing, as the global economy reopens, whether it's wheat, coffee is in the headlines this week. Obviously we know what's happening with oil. We know the problems with shipping. The inflation that these companies are dealing with on their production side, whether it's the cost or just the inability to get certain raw materials is forcing them to raise their prices.