More price increases are on the way (GIS)
According to a letter General Mills sent to wholesalers seen by CNN, the food manufacturer plans to raise prices for hundreds of items by as much as 20% in mid-January. The letter stated, "The current operating environment is as dynamic as we've experienced in at least a decade, resulting in significant input cost inflation, labor shortages, and challenges servicing the business." In the quarter ended August 2021, the company's average unit price in U.S. retail stores was up MSD%, accelerating through the quarter, according to Nielsen. Management indicated on the earnings call that they expected price increases to step up this quarter. The letter isn't surprising, and the phrase "as much as 20%" lacks essential context.
Thanksgiving inflation (KR)
According to the American Farm Bureau Federation, the average cost of this year's Thanksgiving feast has increased 14%. The Farm Bureau has conducted a Thanksgiving survey for 36 years. The Farm Bureau's price checks are consistent with the timing in the past surveys, but according to the USDA, grocery stores began advertising lower prices later this year. According to the Farm Bureau, removing the turkey from the food basket reveals a 6.6% price increase, which is close to the CPI for food. Removing the turkey, which is the largest expense for the meal, is a non-starter for many. Turkeys had the largest price increase at 24% due to higher corn prices and farmers slimming flock size. Whipping cream had the lowest rate of inflation at 2%. Last year's Thanksgiving dinner was the lowest it had been since 2010.
Prices are not the only thing changing this Thanksgiving. Kroger anticipates that 68% of shoppers will visit inside the store for a holiday while the others will increasingly take advantage of curbside pickup and delivery. 74% of Kroger's surveyed respondents expect to attend a gathering the same size or smaller than last year. According to KPMG's survey, 36% of respondents said they planned to attend ten or more people gatherings, up 19% in 2020 and nearly 40% in 2019. AAA estimates 48.3 million people will travel this week by car, up 8.5% from last year but down 3.2% from 2019. AAA estimates that 4.2 million will fly over the Thanksgiving period, up 83% from the prior year.
SJM Q2 review
J.M. Smucker reported FQ2 EPS of $2.43, up 2% YOY, vs. consensus expectations of $2.05. The upside was driven by better sales and SG&A, while gross margins were weaker. Comparable net sales grew 8% with volume/mix of +4% and price of +3%. By segment Pet Foods grew 7%, Coffee grew 8% (volume/mix +5% and price +3%), Consumer Foods grew 9% (volume/mix +6% and price +3%), and International and Away From Home grew 6%. Management said at-home coffee consumption now represents 72% of all coffee drinking occasions compared to 2/3 pre-pandemic. Uncrustables grew 33% and are on track to reach $500M. The Away From Home business is now at 95% of pre-pandemic levels.
Gross margins contracted 300bps due to higher costs for commodities, manufacturing, transportation, and packaging. General and administrative expenses decreased 21% due to cost savings and lower incentive compensation. Operating margins contracted 120bps. Operating margins for Pet Foods contracted 340bps due to higher commodity and transportation costs. Coffee's operating margins contracted 180bps, Consumer Foods contracted 300bps, and International and Away From Home contracted 30bps.
Management raised EPS guidance for the year by $.10 to $8.35-8.75, still below the guidance provided two quarters ago. Revenue guidance was raised to -0.5% to +0.5% from -2.5% to -1.5%. Gross margins are expected to continue to face headwinds from transportation and coffee inflation. Gross margins are expected to contract 150bps sequentially then improve in Q4 with price increases. Cost inflation is now expected to have an LDD% impact on COGS for the year. SD&A expenses are expected to decrease by 7%.
Return to the office (ACI)
According to Kastle Office Systems, the average office occupancy of the top ten cities in the U.S. was 38.8% for the week ended November 17, down 20bps sequentially, as seen in the chart below. San Jose had the largest week-over-week increase in occupancy of 90bps. Despite the improvement, San Jose has the second-lowest occupancy of the top ten cities. Only one other city saw a sequential improvement. The return to the office will determine how permanent the food consumption shift is from on-premise to off-premise. The return so far has been at a modest pace, and the colder weather may end the improvement we have seen.
