Pepsi, Hershey, UPS and other earnings reports hint that inflation pressure is mounting

Inflation is beginning to show up in first-quarter earnings, with a slew of quarterly reports on Thursday highlighting the pressure on margins from the rising costs of a range of raw materials, from fuel to freight costs to food and even wages.

Oil prices, which are mostly dictated by supply-and-demand dynamics, are currently at a 3½-year high, raising costs for energy-dependent industries, such as airlines and transportation and logistics companies. But recent surveys show that companies are paying more for a range of raw or partly finished goods, as MarketWatch’s Jeffry Bartash has reported.

These include steel, which has been impacted by the recently announced Trump administration tariffs on foreign imports.

On Thursday, PepsiCo Inc. PEP, +2.82% said every one of its businesses, from snack brands Frito-Lay to Quaker Foods and beverages, suffered operating-cost inflation in the quarter, due to higher raw-material costs.

“Commodity mark-to-market net impact negatively impacted reported operating-profit performance by 6 percentage points and lower restructuring charges positively contributed to reported operating-profit performance by 6 percentage points,” the company said in its earnings release.

On the company’s earnings call, Chief Financial Officer Hugh Johnston said Pepsi is expecting “some level of gross-margin compression from inflationary input costs,” as it moves through the year. The company is aiming to use tax savings from the December tax-code overhaul to invest in productivity improvements that should help offset inflationary pressures.

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It was a similar picture at confectionery maker Hershey Co. HSY, -0.90% , where the company was anticipating gross-margin contraction in the quarter due to higher freight and logistics costs and investments in trade and packaging.

“However the gross-margin result was below expectations driven by unfavorable mix, cost of complexity and higher input costs,” the company said in its earnings release.

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Margins shrank by 260 basis points to 44.9% in the quarter from the year-earlier period. For the full year, the company is expecting margins to shrink by 125 basis points, compared with a previous forecast that they would be flat.

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“We are taking swift action to mitigate the cost headwinds that many in the industry are facing,” Chief Executive Michele Buck said in the release. “We believe our focus on in-year margin improvement will benefit the company over the long term and enable us to achieve our goals.”

Then there was United Parcel Service Inc. UPS, +4.14% , where operating-expense growth of 12.2% outpaced revenue growth of 10.3%, led by a 17.3% increase in “other” expenses.

Within UPS’s “other” expenses, the biggest increase was the 23.6% spike in purchased transportation, followed by the 20.8% surge in fuel costs, the 20.7% rise in other occupancy costs and the 11.3% gain in repairs and maintenance costs.

Meanwhile, employee pay and benefit expenses increased by 8.8%, while the latest government data showed that hourly wages throughout the economy rose just 0.4% in the past 12 months.

Earlier this week, Caterpillar Inc. CAT, +0.91% provided an example of how these cost increases can impact the broader stock market. The stock swung from an early intraday gain of as much as 4.6% to close down 6.2%, shaving about 66 points off the Dow Jones Industrial Average’s DJIA, +1.31% level, after the company said higher material costs, as well as rising short-term compensation expenses, could weigh on margins the rest of the year.

The maker of mining and construction equipment said higher material costs were largely driven by steel, as U.S. Midwest domestic hot-rolled coil steel futures prices soared 30% during the first quarter, amid concerns over the impact of a potential trade war.

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“We expect steel and other commodity costs to be a headwind all year,” said Caterpillar Chief Financial Officer Bradley Halverson in a post-earnings-report conference call, according to a transcript provided by FactSet.

The increased costs have led the company to implement midyear price increase, but the increases are expected to lag the rise in costs.

“We expect this delta of price versus material cost to be negative for the balance of the year,” Halverson said. (“Delta” refers to the change in the pace of the increases.)

That led Halverson to say that first-quarter results were likely the “high-water mark” for the year.

“While we expect strong operating margins for the rest of the year, which is defined as within or better than the Investor Day ranges, we do not expect to repeat first-quarter operating margin at the consolidated level,” Halverson said. The guidance range provided at the company’s Investor Day was 12% to 16%.

Read: As market churns, Fed will say it has inflation situation under control

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