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B&G Foods (BGS) Battles Cost Inflation, Banks on Pricing

B&G Foods, Inc. BGS has been battling cost inflation, which is weighing on its gross margin. However, the company is on track with its pricing actions, which are likely to catch up with escalated costs in the back half of fiscal 2022. The fourth quarter is likely to be the point of inflection.

Cost Woes & Revised View

In the second quarter of 2022, the company’s gross profit came in at $78.8 million compared with $112 million in the year-ago period. The adjusted gross margin contracted from 24.1% to 16.5% in the quarter under review. The gross margin was hurt by greater-than-anticipated input cost inflation. This includes escalated raw materials and transportation expenses.

The company expects the input cost inflation to have a considerably industry-wide effect in the remainder of fiscal 2022. Management 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.

On its second-quarter 2022 call, management stated that apart from cost inflation, other pandemic-related factors may impact the company’s performance. These include the duration of social distancing and stay-at-home trends, other waves or variants of the pandemic, the operation of manufacturing facilities, the company’s ability to procure ingredients and other raw materials and supply-chain status, among others.

The company expects adjusted EBITDA for fiscal 2022 in the range of $300-$320 million compared with the $348-$358 million range forecast earlier and the $358 million recorded in fiscal 2021. Adjusted EBITDA is expected to decline year over year in the third quarter and be flat to up in the fourth quarter. Adjusted earnings per share in fiscal 2022 are envisioned to be nearly in the band of $1.08-$1.28 now, down from the $1.65-$1.75 band projected before. In fiscal 2021, the metric came in at $1.88.

Other Players Grappling With Inflation

Many consumer staple companies are bearing the brunt of cost inflation. For instance, Church & Dwight CHD has been battling major cost hurdles.

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

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.

Moreover, gross inflation (input cost inflation before hedging and other sourcing gains) is anticipated in the low-teens range in fiscal 2023. 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 basis points (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.

Wrapping Up

Management is on track to mitigate the impact of inflation by undertaking cost-saving initiatives, increasing list prices and locking in prices via short-term supply contracts and advanced commodities purchase agreements. While BGS’ pricing efforts and favorable demand are upsides, we cannot ignore the hurdles stemming from cost inflation in the near term.

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