Pepsi products go on sale at a Target store on March 8, 2022 in Los Angeles, California.
Mario Tama | Getty Images
One thing is clear as corporate earnings season kicks off: Inflation remains a hot topic for companies.
About two-thirds of companies in the S&P 500 that reported earnings in the first two weeks of the season (October 10-21) had officials mention inflation, according to a search of conference call transcripts by FactSet. These companies include PepsiCo, Citigroup and Abbott Laboratories.
“The environment is clearly still very inflationary with many supply chain challenges across the industry,” said Ramon Laguarta, CEO of PepsiCo. The snack and beverage company beat analysts’ expectations for both revenue and earnings per share as its price increases boosted its bottom line, though some units saw volume declines.
Recent economic data show little sign of inflation abating.
The consumer price index rose 0.4% in September, which was hotter than the 0.3% expected by the Dow Jones, according to the Bureau of Labor Statistics. Excluding food and energy, it was 0.6%, which was also higher than the Dow Jones estimate of 0.4%.
The producer price index, which measures wholesale prices, also rose 0.4% in September. That was also above the Dow Jones expectation of 0.2%.
Persistent inflation has caused consumers to reconsider expensive purchases as their purchasing power is constrained, and has also caused higher costs for companies like Procter & Gamble. Last week, the housewares maker of brands like Tide and Charmin released quarterly results that slightly beat analysts’ expectations.
“Raw and packaging material costs including raw materials and supply inflation have remained elevated since we provided our first full-year outlook in late July,” Chief Financial Officer Andre Schulten said during Wednesday’s conference call. “Based on current spot prices and recent contracts, we now estimate after-tax headwinds of $2.4 billion in fiscal 2023.”
The company was among a handful of multinationals to say overseas inflation was eating away at international balance sheets, while U.S.-based pool equipment distributors Citigroup and Pool both said inflation in Europe hurt their businesses in the previous quarter.
Pool said total construction volume in 2022 was likely to decline compared to 2021, although it beat expectations for the quarter.
Inflation is also making it difficult for some companies to fill vacancies. Staffing firm Robert Half said the workforce remains tight, while Snap-On said wages need to keep rising to attract skilled workers. To be sure, Union Pacific said crew availability continued to improve, and HCA Healthcare said it could rely less on contract workers to fill gaps.
This year’s inflationary pressures have prompted several rate hikes by the Federal Reserve. Hiking is expected to continue at least until the end of 2022.
On the fiscal side, the government passed the Inflation Reduction Law earlier this year.
Several companies said the inflation-mitigating law would likely improve their prospects, with those emphasizing green energy poised to benefit from the alternative energy legislation’s tax credits.
Electric vehicle maker Tesla said it was too early to predict any specific impact on demand, but expected to reap the benefits of the legislation for consumers moving away from gas-powered cars. The company beat expectations for third-quarter earnings per share, but revenue came in lower than analysts had expected.
How long does the pressure last?
Predictions of how long this pressure will last vary depending on which executives are asked for their opinion.
“Inflation remains a persistent force around the world, although we are beginning to see some moderating effects in certain areas of our businesses compared to earlier in the year,” Abbott CEO Robert Ford said Oct. 19. The science company beat expectations for the quarter with earnings per share that were nearly 23% higher than expected.
Manufacturing company Dover also said inflation had fallen compared to the past year and a half, noting in particular the company’s falling costs related to logistics and raw materials. This view aligns with some economists, who said “soft” indicators of inflation are falling faster than the Fed’s favorite main indicators, such as CPI, which can lag.
“Obviously we are cautious about how the market is going,” Dover CEO Richard Tobin said Oct. 20. “I fundamentally disagree with what the Fed is doing now.”
Others, however, were not so optimistic. Whirlpool and Tractor Supply Company both said inflation should remain at current levels through the first half of 2023 before cooling off. Tractor Supply beat earnings per share but missed sales, while Whirlpool’s earnings per share came in below expectations by about 16%.
“Inflation remains persistent and high, and we expect it to continue well into 2023, with some moderation in the second half of 2023,” said Harry Lawton, CEO of Tractor Supply.