4 Companies Clipped By Rising Commodity Costs

By Eric Fox | May 06, 2011 AAA

Many large consumer companies have seen profits slammed by unplanned increases in input costs, as higher commodity prices work through the supply chain. These companies are coping with the inflation through various means, including price increases and cost cutting.

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The Victims
Kimberly Clark (NYSE:KMB) expects higher costs during the balance of the year, and reduced the lower end of its earnings guidance range for 2011. The company is now looking for adjusted earnings per share to be in a range from $4.80-5.05 per share, down from the previous range of $4.90-5.05 per share. Kimberly Clark cited "significantly higher input cost inflation" on virgin pulp, polymer resin and other oil based materials, and estimates that cost inflation in 2011 will range from $450 million to $550 million, compared to the previous range of $200 million to $250 million. The company will deal with the issue through raising prices and cutting costs.

Procter and Gamble (NYSE:PG) saw experienced similar inflation in some of its input costs, and lowered the top end of its earnings guidance range for 2011. The company now expects core earnings per share to be in a range from $3.91-3.96, down from the previous high range of $4.01 per share. Procter and Gamble said that costs for materials and energy will be up by $1.8 billion in the current fiscal, compared to last year. The company has already increased prices on many of its brands, including Duracell, Gillette, Bounty, Charmin and Pampers.

Clorox (NYSE:CLX) reported a 50 basis point decline in gross margin in its most recent quarter, compared to the same quarter last year, with the company citing unfavorable commodity costs as part of the reason for the drop. Clorox estimates that gross margin will be between 75 and 100 basis points lower in the full fiscal year. This damage will continue in fiscal 2012, as Clorox is looking for further increases in commodity costs of between $160 million and $170 million over fiscal 2011. Clorox is attempting to mitigate the cost inflation through price increases, and announced a 9.5% increase in prices for one of its product lines.

Kellogg's (NYSE:K) is the latest company to be impacted by higher-than-expected input costs in the first quarter of 2011. The company reported a 10% decline in operating profit, due in part to rising commodity costs. Like its competitors, Kellogg's has announced price increases on a range of product lines to deal with the increased costs, and expects gross margin for the full year to decline by 50 basis points over the previous year, as the company sees its cost of goods sold line to be up from 7% to 8% on 2011. One interesting point is that this negative cost impact occurred even though Kellogg's hedged 85% of its commodity costs in 2011.

The Bottom Line
Many companies suffered lower-than-expected profits in the first quarter of 2011, as rising commodity costs cut into the bottom line. This is being handled through a combination of cost cutting and price increases, as the inflation is expected to continue for the rest of 2011. (For related reading, also see Food Price Inflation Still a Big Deal.)

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