With inflation at its highest rate since 1990, it’s not just consumers that are feeling the pinch. Many stocks to watch in the consumer products and retail spaces are feeling it as well. Sure, rising prices are driving demand for some companies in the consumer staples sector, such as discount stores. But between the cost of inventory, labor, raw materials and shipping going up, increased sales may not correspond with increased profits.
At least across the board. Some companies have more proactively passed along rising prices to consumers. Coupled with cost-savings initiatives, some have also done a better job managing the unprecedented run-up in prices. What’s more, a strong earnings season has helped bolster the argument that fears of widespread inflationary pressures may be overblown.
However, if elevated rates continue into 2022, as consumer companies such as Unilever (NYSE:UL) have started to warn their investors? Results in the current quarter — and in the first few quarters of next year — may be affected. Many investors may consider names in this area of the market to be “safe harbors” compared to more speculative and volatile names. But you may also want to pay close attention to how they’re handling these not-so-“transitory” headwinds.
For these seven stocks to watch, keep an eye on how they’re tackling inflation. Some of them stand to thrive in spite of it, while others could struggle because of it:
- Best Buy (NYSE:BBY)
- Costco (NASDAQ:COST)
- Dollar General (NYSE:DG)
- Kroger (NYSE:KR)
- Mondelez International (NASDAQ:MDLZ)
- Procter & Gamble (NYSE:PG)
- Walmart (NYSE:WMT)
Stocks to Watch: Best Buy (BBY)
First up on this list of stocks to watch is BBY stock. Similar to other brick-and-mortar retailers like Target (NYSE:TGT) and Walmart, Best Buy has found success with its omnichannel (in-store and e-commerce) strategy. As a Seeking Alpha commentator recently discussed, the electronics chain more than doubled its e-commerce market share between 2018 and 2020. This move has also enabled it to grow sales, while at the same time reducing its store count.
That said, you may ask if the Best Buy strategy is tackling inflation. Shouldn’t rising consumer prices, plus supply shocks, be impacting the business? Yes and no. So far, as seen from Best Buy’s last earnings report, increased sales volume has more than made up for any issues related to inflationary pressures. For its fiscal quarter ending Jul. 31, the company reported earnings per share (EPS) of $2.90, well above analyst estimates calling for $1.85 per share.
And as for margins? Best Buy’s non-GAAP operating margins for the fiscal second quarter came in at 6.9%, a full percentage point above levels seen in the prior-year quarter (5.9%). Again, though, much of this had to do with increased sales, itself driven by the post-lockdown “reopening.” When the company reports again, we may start to see the impact of rising prices on its bottom line.
In recent weeks, investors have bid up the price of BBY stock. Trading for around $105 per share in early October, it now changes hands for around $133 as of the Nov. 17 close. With bullishness returning to the name — and after an extended period of it being out-of-favor — you may want to tread carefully with BBY as we close in on its next results.
Inflation is certainly helping Costco’s top line. During October, according to Supermarket News, the discount club operator saw its sales rise 19.2% year-over-year (YOY), from $13.82 billion to $16.47 billion. That was above even the double-digit percent YOY sales increases seen in September (15.8%) and October (15.9%) 2020.
Will this help out COST stock when it next reports earnings? That’s unclear. In the past 30 days, the sell-side community has by-and-large upped its EPS estimates for results for fiscal Q1, which ends in November. Remarks made by CFO Richard Galanti back in September may also signal that the company will deliver strong numbers despite inflationary headwinds.
Galanti admitted that Costco is dealing with soaring freight and labor costs as well as inventory shortages, saying that “We’re pragmatic about it” regarding passing rising costs to the consumer. But the CFO also added the following when referring to the company’s game plan to handle inflation: “I think all those things so far, at least despite the challenges, have worked in our favor a little bit.”
Like with BBY stock, investors don’t seem too worried about the impact of rising costs with COST. It has been on a tear in the past one month, rising 16% to above $520 per share today. Despite its rich valuation — a forward price-to-earnings (P/E) ratio of 43 times — Costco is still one of the stocks to watch. If it can beat estimates for this quarter, chances are it will remain a darling among investors.
Stocks to Watch: Dollar General (DG)
As discussed above, discount stores have seen a boost in sales demand thanks to rising consumer prices. In fact, on Nov. 10, consumer spending at discount stores was up by 21% from the first week of November as well as up 65% since the same period in 2019.
This may explain why DG stock, after its sharp drop in September, has started to bounce back lately. What’s still unclear, however, is whether dollar stores like other discount retailers can overcome the challenges of rising prices. So, how do things shape up for Dollar General?
Despite the name, this chain began to sell products for more than $1 per item long ago. To mitigate the impact of rising prices on profitability, CEO Todd Vasos has a seemingly solid game plan. First, the company has raised prices on certain products. Second, Dollar General has the advantage of stocking a more limited selection of products in its stores compared to regular discount retailers. This gives the company more flexibility to discontinue the sale of certain products if margins on them tighten significantly.
Only time will tell whether this game plan works out for Dollar General and in turn helps this pick of the stocks to watch move to higher prices. That said — reasonably priced at 22 times forward earnings and equipped with a “safe harbor” reputation — you may want to give DG stock a closer look.
In my prior coverage of Kroger and KR stock, I’ve pointed out its appeal as a deep value stock. But admittedly, inflation is something that could turn Kroger into a full-blown value trap. Or will it?
Results last quarter did show lower gross margins despite coming in ahead of expectations. This was due to the grocery chain absorbing the bulk of rising food prices. However, this may not repeat itself this quarter, as Kroger starts to raise prices. Plus, that’s not all. Besides possibly being on top of inflationary headwinds, other initiatives from the company may help to counter the expected decline in sales in a post-Covid-19 environment.
That said, although Kroger may be more resilient than skeptics give it credit, I wouldn’t expect the company to deliver out-of-the-park levels of growth either. At best, based on analyst earnings forecasts, it may just be able to deliver results in fiscal 2022 (ending January 2022) in line with the earnings it reported for fiscal 2021.
In turn, this means that, while cheap, there’s only so much multiple expansion possible for KR stock. Trending higher in recent weeks, you may not want to jump into this one right away. But, given its prospects in handling inflation — plus its recession-resistant qualities — you should still keep Kroger on your list of stocks to watch.
Stocks to Watch: Mondelez International (MDLZ)
Next up on this list of stocks to watch is MDLZ stock. Mondelez — which owns brands like Cadbury, Oreo and Ritz — is of course dealing with challenges driven by rising costs and supply shocks. In response to higher labor and shipping costs, the company is passing along these costs to the consumer.
At first glance, this may sound like a recipe for lower-than-expected sales. Increased prices for branded confectionery and snack products may result in households opting for lower-price substitutes, such as store-brand products. Even CEO Dirk Van de Put has conceded that what will result from these price increases is “a bit of a guess at the moment.”
In its most-recent quarterly results, Mondelez did beat on revenue as well as earnings. It also raised its forecast for the current quarter. The analyst community has lowered its average estimate for earnings in the past month, however. Estimates went down from 76 cents to 73 cents, according to the Wall Street Journal.
Put simply, it appears this consumer products company is more vulnerable to inflation than the other retailers mentioned above. So, how should you approach MDLZ stock? Priced at 21.5 times forward earnings, shares are reasonably priced. Yet with the prospect of it falling short of expectations in the quarters ahead? You may want to give Mondelez a pass for now.
Procter & Gamble (PG)
Procter & Gamble is another one of the consumer stocks to watch when it comes to tackling inflation. This household products conglomerate has been quite blunt with regards to how much rising costs could affect its bottom line.
When it announced earnings and outlook last month, P&G raised its inflation forecast, due in part to continued spikes in freight and materials costs. Instead of a $1.9 billion impact to earnings, the company now expects a $2.3 billion impact. That said, the company has interestingly kept its fiscal 2022 (ending June 2022) earnings forecast as-is.
This bit of discouraging news did cause shares to fall back when reported. However, PG stock has recently trended higher again, now trading near its 52-week high. On Nov. 17, shares closed at $147.10. Currently trading at 25 times forward earnings — and armed with a 2.37% dividend as well as “safe” blue-chip status — it makes sense why investors still seem bullish on this name. Even as the company itself is upfront as to what degree earnings could be affected.
After many quarters of beating EPS estimates, shares could see a big impact if results start to fall short. PG stock may be a Dividend Aristocrat and one of those names usually recommended to buy and hold in all markets. Nevertheless, with no apparent end in sight for today’s inflation issue, there may not be much reason to buy this stock today.
Stocks to Watch: Walmart (WMT)
Last up on this list of stocks to watch is WMT stock. This week, both Walmart and Target reported earnings. Both releases were top of mind among investors. The retail giants themselves have so far been able to deal with issues driven by increased costs — namely, as has been the case with other retailers, by passing rising costs to the consumer.
For the preceding quarter, this may have been a successful strategy. That is, it may have been able to raise prices with minimal impact on demand. However, with both WMT stock and TGT stock treading water in recent weeks, the market was hesitant. Despite beating on earnings and sales estimates, WMT dipped slightly following its release.
That said, beyond recent results, one concern among investors has also been whether rising prices will eventually impact demand. In the case of Walmart, however, there are some encouraging signs. For instance, there have been reports that the company is closing the price gap with Amazon (NASDAQ:AMZN). This may signal that the company is at less risk now of getting undercut by the e-commerce giant. As prices move higher, being able to beat in this area will continue to be important.
Overall, WMT stock has traded sideways in 2021 due to fading pandemic tailwinds. So, what’s the best move now with these shares? You may want to wait for investors to further digest the recent Walmart earnings release.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.