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Church & Dwight (CHD) Battles Cost Inflation, Banks on Demand

Church & Dwight Co., Inc. CHD has been battling cost inflation. The company has been witnessing a shrinking gross margin for the past few quarters. Though the company is undertaking pricing and productivity efforts to counter high costs, inflation is likely to come at a greater rate than pricing and productivity in 2022. However, favorable demand is an upside.

Cost Woes & Revised View

In the second quarter of 2022, Church & Dwight’s gross margin shrunk 220 basis points (bps) to 41.2% due to the adverse impacts of increased raw material, manufacturing and distribution costs. These were partly offset by better pricing, productivity and an improved mix.

On its second-quarter earnings call, Church & Dwight stated that it now expects to witness additional cost inflation of $135 million in 2022, $50 million higher than its earlier expectations. The incremental inflation is mainly associated with raw and packaging materials as well as the pass-through of similar costs from third-party manufacturers.

For 2022, as well as the third quarter, the gross margin is likely to be down from the respective year-ago period levels. Apart from this, marketing dollar spend is likely to considerably increase in the second half of 2022 compared with the first half.

Management now anticipates the EPS to be flat year over year in 2022 with the adjusted EPS in 2021. Earlier, the metric was anticipated to grow at the lower end of the 4-8% range. The revised view reflects the impact of increased cost inflation and currency headwinds (of nearly 1%).

For the third quarter, the EPS is projected at 65 cents, suggesting a 19% decline from the year-ago quarter’s adjusted figure, due to inflation, elevated expected SG&A expenses and promotional spend.

Many other consumer staple companies are bearing the brunt of cost inflation. For instance, Conagra Brands CAG has been encountering the cost of goods sold inflation for a while now. On its last earnings call, management at CAG stated that the macroeconomic landscape remains volatile and it expects the cost of goods sold inflation to linger in fiscal 2023.

In the fiscal year, gross inflation (input cost inflation before hedging and other sourcing gains) is anticipated in the low-teens range. Apart from this, Conagra Brands intends to raise its SG&A investment to facilitate infrastructure and continued automation and support talent.

Flowers Foods FLO is battling major hurdles due to cost inflation and supply-chain bottlenecks. In the second quarter of fiscal 2022, FLO’s materials, supplies, labor and other production costs (excluding depreciation and amortization) escalated by 240 bps to 51.9%. This resulted from increased ingredient and packaging expenses, which led the gross margin to contract 240 bps to 48.1%.

Flowers Foods expects inflation to reach its peak in the third quarter.

B&G Foods BGS has been battling major cost hurdles as well. BGS expects the input cost inflation to have a considerably industry-wide effect in the remainder of fiscal 2022.

Further, B&G Foods expects to keep seeing significant cost inflation for inputs, such as ingredients, packaging, labor and transportation, due to factors like the pandemic, the Ukraine war, weather conditions, supply-chain hurdles and the shortage of labor.

Wrapping Up

Church & Dwight has been benefiting from favorable consumer demand and the benefits of acquisitions. In the second quarter of 2022, the company saw consumption gains in 11 out of 17 domestic categories.

Management expects 2022 to turn out as another solid year for Church & Dwight, even in the face of a volatile landscape. It expects the robust consumption of value detergents in the second half of 2022 to be negated by sluggishness in discretionary brands like Waterpik and Flawless and reduced vitamin category consumption growth.

While CHD’s pricing efforts and favorable demand are upsides, we cannot ignore the hurdles stemming from cost inflation in the near term.

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