If there were any doubt interest rates were going to be hiked by the U.S. Federal Reserve, the latest inflation number puts those thoughts to bed. U.S. consumer prices rose by 7% in 2021, the largest 12-month gain since April 1982. Rising prices from America’s top consumer brands are expected to carry well into 2022.
So far, America’s largest companies have been able to pass on their higher input costs to consumers, but that might not last. The next year will most certainly test the loyalty factor of some of America’s favorite consumer brands.
Fortune reported on the loyalty factor back in November. Here is what Supermarket Guru Phil Lempert had to say at the time:
“‘Consumers are watching very carefully how much money they’re spending on groceries. They’ve seen the price of groceries go up. It’s continuing to go up. And just because you have a national brand that’s iconic for 100 years doesn’t mean that you can raise prices.’”
History has shown that some companies are better suited than others to meet the ravages of inflation. Hopefully, we’ll see inflation slow in the months ahead. In the meantime, I have a list of 10 companies to keep an eye on over the next quarter or two. Will their sales and profits take a hit? Long-term, they’re all excellent investments.
The 10 consumer brands to watch are:
- Procter & Gamble (NYSE:PG)
- Nestle (OTCMKTS:NSRGY)
- PepsiCo (NASDAQ:PEP)
- LVMH (OTCMKTS:LVMUY)
- Hershey (NYSE:HSY)
- Clorox (NYSE:CLX)
- McDonald’s (NYSE:MCD)
- Constellation Brands (NYSE:STZ)
- Whirlpool (NYSE:WHR)
- Chipotle Mexican Grill (NYSE:CMG)
Consumer Brands to Watch: Procter & Gamble (PG)
It has been a busy year raising prices for the maker of Tide and so many other well-known consumer brands. So far, the company has raised prices across 10 product categories with more to come in 2022.
“‘The degree and timing of these moves are very specific to the category, brand, and sometimes the product form within a brand. This is not a one-size-fits-all approach,’ [Chief Financial Officer] CFO Andre Schulten said on the earnings call,” CNBC reported.
According to the company, it expects to spend $2.3 billion in the latest quarter on commodity costs and an additional $200 million for freight. Both are after taxes.
While higher prices often force consumers to select a cheaper brand, P&G hasn’t experienced this in recent years.
“‘Pricing has been a positive contributor to our top line for 17 out of the last 18 years, 42 out of the last 45 quarters.’ [Chief executive Officer] CEO Jon Moeller said Wednesday on CNBC’s “Squawk Box.”
Will 2022 be the year it fails to convince its customers to open their wallets a little bit more?
The maker of Gerber baby food, Perrier sparkling mineral water, KitKat chocolate bars, and Nescafe coffee announced its fourth-quarter (Q4) 2021 results on Feb. 17. They would best be described as good, if not great.
Inflation was a big part of the company’s focus in its latest earnings announcement. Its Q4 2021 press release mentions pricing 37 times. Higher prices contributed to 27% of its 7.5% organic growth in 2021. In Q4, pricing accounted for 3.1% of its organic growth.
The company expects for things to get worse in 2022.
“It is a safe assumption that our input cost increases for 2022 will be higher than 2021, that is something that we have to reflect in our pricing,” Chief Executive Officer (CEO) Mark Schneider told reporters.
An interesting point unrelated to inflation: Nestle sold 22.26 million shares of L’Oreal (OTCMKTS:LRLCF) in December. That reduces its ownership in the beauty products company to 20%. That sale made a major contribution to Nestle’s profit in 2021.
On a positive note, the company has been conservative in its profit margins for the year. It expects an underlying operating profit margin of 17.25% at the midpoint of its guidance.
Investors can expect its margins to accelerate in the second half of the year.
Consumer Brands to Watch: PepsiCo (PEP)
If you take a look at PepsiCo’s Q4 2021 conference call transcript, you will see that the word “pricing” is mentioned 19 times. Go back two years to Q4 2019; it is mentioned only twice. It is clear that rising prices are a big issue for PepsiCo.
Here is what Chairman Hugh Johnston had to say about pricing:
“[G]iven the combination of what we know about costs and what we know about pricing, we ought to be able to get through the year pretty well intact on margins, acknowledging the fact that earlier in the year the cost pressure is a little bit higher than it is later in the year.”
For its 2022 guidance, PepsiCo is projecting a 6% increase in organic revenue and an 8% increase in its core constant earnings per share (EPS). That organic revenue growth is less than the 9.5% growth in 2021. Its core earnings are expected to be $6.67 a share.
For fans of buybacks, it plans to do $1.5 billion in share repurchases in 2022.
Of all the consumer brands you would think could absorb higher input costs, a luxury-focused company such as LVMH would be at the top of the list.
In a sign that even the luxury brands are getting pinched, the company’s Louis Vuitton brand is raising prices on a global basis to cover the additional costs it faces both in manufacturing its products and transporting them.
The increases will affect leather goods, fashion accessories, and perfumes. How much prices increase will depend on the product. While it hasn’t said anything about regions affected, most businesses increase their prices to reflect a customer’s ability to absorb those price increases. It will be interesting to see how this plays out.
“‘The price adjustment takes into account changes in production costs, raw materials, transportation as well as inflation,’ the label said in a statement given to Reuters.”
Reuters reported that some handbags currently selling for $7,323 in China could jump by 20% or more. However, those figures haven’t been confirmed by the company.
LVMH CEO Bernard Arnault told analysts in January that it has to be reasonable with its price increases in 2022.
In my experience, LVMH is one of the best-run companies anywhere. It will manage to find the right balance.
Consumer Brands to Watch: Hershey (HSY)
Hershey delivered record results in 2021. Sales increased 10.1% to $8.97 billion while its adjusted EPS increased 14.3% last year to $7.19 a share.
“‘In 2021, we delivered a record year of production and double-digit sales and earnings growth, with a strong finish and momentum heading into 2022. While the environment remains volatile, we are confident in our ability to continue to respond to the changes in the world around us and deliver another year of advantaged performance in 2022,’ said Michele Buck, The Hershey Company President and Chief Executive Officer.”
In 2022, the company expects sales to grow by 8% – 10% with adjusted EPS rising between 9% – 11%. To achieve this growth, it will raise prices across all segments and products to offset higher labor, logistics, and raw material costs.
Candy and chocolates are two products that consumers don’t seem to have an issue absorbing higher prices.
On an interesting side note, Hershey bought one million shares of its stock in February from the Hershey Trust Company. It paid $203.35 per share. As of Mar. 18, 2021, the Hershey Trust Company controlled 80.6% of the company’s stock.
Clorox reported Q2 2022 results on Feb. 3. Not only were they a big comedown from last year’s record performance — 8% decline in sales, 1,240 basis-point decline in gross margin, and 67% decline in earnings — but its stock got pasted after acknowledging that it would increase prices on 85% of its products by the end of June.
In 2022, it expects to spend an extra $500 million on commodity and transportation costs. The company will try to find cost savings where it can over the final two quarters of this fiscal year. However, it expects gross margins to fall by 750 basis points in 2022 to 36.1%. Clorox originally planned to increase prices on 70% of its products, an indication that its costs have risen faster than anticipated.
Despite the cost issues it faces, if you look at its sales for the Q2 2021 compared to Q2 2020, they actually increased by 19%. So, life isn’t as bad as you might think at the disinfectant company.
CLX stock is now trading lower than where it was in November 2019. This could be the perfect time to take a position in a company whose products won’t go out of style.
Consumer Brands to Watch: McDonald’s (MCD)
Here is a crazy statistic. Over the past 52 weeks through Feb. 17, McDonald’s is outperforming the S&P 500 by 506 basis points. The Golden Arches has always been the gold standard amongst restaurant stocks. It might struggle from time to time, but ultimately, it finds a way to deliver for shareholders.
One of the reasons it has been able to deliver over the long haul is its pricing power.
To demonstrate this, The Economist invented the Big Mac Index in 1986. The magazine tracked the price of the burger against other currencies. It turns out the price of a Big Mac has increased by 40% over the past 10 years. By comparison, the Consumer Price Index is up 22% over the same period.
Interestingly, just as consumer prices rose 7% in 2021, so too did the price of the Big Mac. However, while life has gotten a lot more expensive for most people, McDonald’s ought to remain relatively unscathed by this trend.
In the company’s Q4 2021 conference call on Jan. 27, Chief Financial Officer Kevin Ozan said that prices are going up in 2022, but that it will have to balance that with the value pricing it is known for. It raised prices in 2021 and that led to strong same-store sales in its U.S. stores.
I have a hard time imagining people will balk at an $8 Big Mac when they’re willing to spend hundreds each month on their various subscriptions.
Constellation Brands (STZ)
If you like Corona and Modelo beer, be prepared to pay more in 2022.
The Rochester-based marketer of beer, wine, and spirits said on its Q3 2022 conference call that it expected to raise prices by more than the usual 1% – 2% in the year ahead. While it mentioned higher input costs as a reason for the increases, it also suggested there is a shortage of brown glass at the moment.
As a result of increased costs, gross margins could fall below their 39% – 40% range in fiscal 2023. However, as the company pointed out in its call, its margins are still good compared to its peers.
Despite the higher costs in 2022 and beyond, Constellation still expects to grow its earnings. In 2021, excluding its investment in Canopy Growth (NASDAQ:CGC), it earned $10.44 per share. In 2022, it expects earnings between $10.50 and $10.65 per share. That is based on a big decline in wine and spirits offset by a 10% – 11% increase in beer sales.
Down about 19% from its 52-week high of $258 in early January, STZ stock is in buy territory.
Consumer Brands to Watch: Whirlpool (WHR)
If you believe in the concept of regression toward the mean, Whirlpool could be an interesting contrarian play at current prices.
Over the past five years, its stock has gained a measly 7.7%. That compares to almost 88% for the index. It has underperformed the index for virtually its entire history as a public company.
So why is it a buy? Because investors expect so little from the maker of refrigerators, dishwashers, and many other household appliances.
The company said in late January that it raised prices to offset the $1.25 billion increase in raw materials in 2022. However, despite the extra costs, it expects revenues to increase by 5.5% at the midpoint of its guidance. It also expects to be $28 a share at the midpoint of its guidance. Both are higher than analyst estimates.
Below $200, I see investors making money on Whirlpool over the next two to three years.
Chipotle Mexican Grill (CMG)
I happened to watch the HBO documentary about Carl Icahn last night. Without giving away too much, part of the documentary covered the classic Herbalife Nutrition (NYSE:HLF) battle between Icahn and Bill Ackman. That was clearly Ackman’s worst moment in his career. People said he was finished.
Well, since then, he has delivered some of the best returns of his career, thanks to stocks like Chipotle. In fact, Pershing Square’s position in CMG got so big he recently cut his ownership stake from 5.4% to 4.2%.
“‘What started out as a large position recently became a massive one, in excess of 20% of capital,” Ackman told Reuters, adding ‘We sold stock earlier this week only for portfolio management reasons.’”
When Chipotle reported its Q4 2021 earnings on Feb. 8, the company noted that its prices in 2021 were 10% higher than in 2020. It also said that it hiked prices 4% in December alone to make up for higher labor and food prices.
Chipotle says that it has seen little pushback from its customers due to higher pricing. It expects to raise prices some more in 2022.
CMG shares have generally gone sideways over the past year. However, I doubt you’ll be able to buy some in the $1,300s anytime soon. But if you can, do so. It has plenty of pricing power to ride the inflation wave.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.