Inflation is mild? That's what the government says, but investors paying attention to earnings calls are hearing something they haven't heard in a awhile: Some bold companies are raising prices.
Companies aren't required to disclose price hikes, but attentive investors can find clues of where they're happening. Companies like burrito chain Chipotle (CMG), cigarette maker Philip Morris International (PM) and health-care goods seller Allergan (AGN) told investors during second-quarter conference calls how they've been successfully jacking up prices or selling more high-priced items.
At least 11 companies in the Standard & Poor's 500 mentioned raising prices during conference calls over the past three weeks. The number is relatively small, but investors hope there's more to come, since it's still early in the reporting season and more than half the companies in the S&P 500 have yet to report.
Price increases could be a major boost for corporate profit. The ability to raise prices is a major shift investors have been hoping for throughout the recovery. Much of the earnings gains during the recovery have been due to cost cutting. But if companies are finally in the position to increase prices, that could give the bottom line at companies a whole new driver.
Reasons, rationale and reaction to higher prices have been varied, including:
* Chipotle Mexican Grill (CMG). The burrito chain jacked up prices 6.3% to 6.5%, the company's CFO John Hartung told analysts. Prices were increased to "pass along some of the inflation we absorbed over the past three years," he said. Consumers don't seem to mind too much. If there was any impact, it's that some consumers shifted from beef to chicken, since beef prices rose 9% on average compared with 5% increases for chicken, Hartung says.
* Philip Morris International (PM). The cigarette maker has been increasing prices in many of the countries it does business in. CFO Jacek Olczak told investors it increased the price of Bond Street, Chesterfield, Lark and L&M brands. "Our strong and diverse brand portfolio is driving market share gains and enabling us to increase prices," he said.
* Allergan (AGN). The company, best known for selling Botox, told investors it's finding the ability to increase the prices on ophthalmic products, such as its Pred Forte-branded eye drops. Sales remained strong despite the price increases, CEO David Pyott told investors, and the company even cleared out inventory. The company said it was able to increase prices because of a shortage of some ophthalmic products in the U.S.
* Hershey (HSY). The chocolate and food company's CEO John Bilbrey told investors price hikes are coming. "On everyday items, consumers will start to see higher prices primarily on instant consumables and on in-aisle non-merchandise take-home items," he said. Hershey didn't give details on which products would see price hikes, but Bilbrey told investors the hikes might result in fewer goods being sold. Perhaps the fact that the price hikes haven't kicked in yet explains why Hershey is one of the three companies in the sample where gross margin hasn't increased — yet.
* 3M (MMM). The maker of everything from Post-It Notes to industrial goods pointed to higher prices as a result of the company's improved profitability. "Selling prices continue to be supported by technology innovation," CFO Nicholas Gangestad told investors. The company already started raising prices in emerging nations in mid-2013, he said.
* Kimberly-Clark (KMB). The paper products company's CEO Thomas Falk pointed out that competitors have been raising prices, and Kimberly-Clark "followed." These price hikes are "still rolling out as we speak," he told investors.
* Sigma-Aldrich (SIAL). The maker of medical equipment didn't give much detail on price hikes, but acknowledged they're happening. The company said higher prices were part of the reason for improved profitability.
* PulteGroup (PHM). The homebuilders' numbers weren't particularly inspiring. Its adjusted quarterly profit of 25 cents a share merely matched views. But if there was one bright spot, it's in pricing. Pulte CFO Robert O'Shaughnessy told investors the company saw a 12% average increase in selling prices during the quarter.
* D.R. Horton (DHI). Another homebuilder in the S&P 500 talked about price increases. The company's average closing price during the just-completed quarter was 8%, "largely driven by increases in average selling prices in our Southeast and West regions," CFO Bill Wheat said. But the company did say price hikes aren't universal, but on a community-by-community basis, perhaps explaining why the company's gross margin still fell 5% from the year-ago period.
* Campbell Soup (CPB). The company hasn't reported second-quarter results yet. But in a presentation to investors and analysts on July 21, the company talked about increased prices. Campbell didn't provide much detail on what it was raising prices on or by how much, but CFO Anthony DiSilvestro told investors that higher prices the soup maker is paying for ingredients "were partly offset" by higher selling prices.
* Netflix (NFLX). Reed Hastings, the company's CEO, told investors consumers have accepted the recent price hikes and any hit to the business has been "pretty nominal." "I really think it's background noise," he told investors. "When we make a small change in price and handle it appropriately, it really makes no noticeable effect in the business. So that's why we're thrilled with the outcome."
Remember too, companies may be raising prices, but didn't mention that fact in conference calls or weren't asked about it.
But the numbers prove out the power of raising prices and the profound impact it could have on profit. Investors keep a close eye on so-called gross margin, as a way to compare the growth of revenue compared with the cost of raw materials. A rising gross margin might suggest to analysts the company is getting pricing power (relative to direct costs). The companies that talked about prices during the past three weeks — saw their gross margins rise 2.6%. That well outstrips the 0.2% decline in gross margins by the 181 non-financial companies that have reported second quarter results so far.
A 2.6% increase in gross margins might not sound like much, but that's powerful leverage that allows profit to ripple through the income statement. And investors hope this is just the first round in more companies having the power to raise prices by larger amounts. For instance, J. M. Smucker (SJM), the maker of top-selling Folgers coffee, announced in June it's hiking the price on most of its U.S. packaged coffee by an average of 9%. That's the biggest price hike since 2011. The company reports second-quarter earnings on Aug. 18.
Below are the 11 S&P 500 companies that have mentioned pricing power on conference calls, as well as the improvement in their gross margins (except Campbell, which hasn't reported yet.)
|Company||Symbol||Q2 Gross Margin % Ch.||YTD Stock % Ch.|
Sources: S&P Capital IQ, USA TODAY research
Investors paying attention are getting an edge. As a group these price-hiking stocks are up 8.4% this year on average, topping the 7% increase by the S&P 500 during the same time. And equal-weighted index of the 11 stocks talking about price hikes are up 7% since the start of the second quarter, beating the 5.7% increase of the S&P 500.
Chart source: S&P Capital IQ, USA TODAY research