Packaged food companies have been the main beneficiaries of the pandemic as food at home soars. Now investors are worried about the sale will start to wobble when people get back to eating, even when margins hit increasing input costs. Both of these worries began to look excessive.
reported organic sales growth – which eliminates the impact of acquisitions, divestments and currency movements – of 2.5% from a year earlier in the first quarter. That compared with analyst expectations for growth of around 1%, according to Visible Alpha. Keep in mind that sales compared to the start of the kitchen storage wave in the first quarter of last year when Kraft Heinz organic sales jumped 6.4%.
The company said it expects single-digit cost inflation for the rest of the year, in line with similar guidance from peers including
as food inputs are increasingly expensive, along with shipping and logistics. Prices of soybeans, wheat and sugar futures have risen 82%, 40% and 73% respectively over the past 12 months, according to FactSet.
Investors don’t have to worry too much about this. Barclays analyst Andrew Lazar says history shows that food companies have generally been able to weather periods of inflation, even after the lull, through a combination of rising customer prices and cutting costs. When commodity costs fall, the increase in prices persists, leaving the company in a better position in the long run.
This pattern was evident during the last two waves of commodity price inflation around 2007 to 2008 and 2012 to 2014. Kraft Heinz doesn’t exist in its current form, but looking at colleagues like General Mills,
they generally come out of both episodes with a higher operating margin after the initial drop. At General Mills, for example, profit margins before interest and taxes fell from 16.6% in the fiscal year ended May 2008 to 15.4% in fiscal 2009. Then they jumped to 18% in fiscal 2010, according to S&P Global Market Intelligence. .
Meanwhile, on the demand side, evidence is mounting that households continue to consume significantly more food at home than before the pandemic, even though it has reopened. It could happen at least in part because they have invested in kitchen equipment and improved their cooking skills over the past year.
This is true even for people who are fully vaccinated, according to research firm Numerator, based on a panel of 100,000 buyers. In the three weeks to April 10, purchases by vaccination buyers of “store-center” groceries – essentially packaged foods – were up 7.6% from the same period in 2019, said Numerator. That’s less than the 11.6% growth among all panelists, but it’s still impressive.
Not all pandemic recipients will look good during recovery. However, food stocks are likely to challenge skeptics.
Write to Aaron Back in [email protected]
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