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Pricing power amidst rising prices📊

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Pricing Power

Spending or investing? As the cost of living continues to rise, for someone spending while investing, companies with pricing power may present an opportunity for one to secure future buying power amidst the uncertainties 🍔🍱🍲

And while we are on the wealth transfer topic, we take a look into three of the biggest consumer stocks that continue to reflect the reliance of consumers on their products, despite the price hikes, creating a profitable environment for shareholders.

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Shoprite Holdings Limited (SHP)

From necessities to wants, for Shoprite, whether lockdown or back to normal, the engine for earnings was not off. The group continued to generate revenue during global restrictions through some of its essential products and services, despite the significant setback from the global restrictions. As one of Africa's largest retailers, the group has over 2 400 stores. 

Reflecting pricing power during uncertainties with inflation rising, sales during the 26-week period, which ended on 2 January 2021, increased by 10% to R91 billion. This was above the pre-Covid sales of R71 billion in the comparative period in 2019. With an increase in headline earnings per share of R5.19, the group paid a dividend of R2.33 per share. In South Africa, amidst the rising cost of living and other disruptive events, the company reported an 11% increase in sales. In terms of expansion and growth, Shoprite spent R2.24 billion on investments during the six months. By the end of the group's second half, operations in Kenya, Madagascar, and Uganda will be discontinued. 

According to group CEO, Pieter Engelbrecht, "We've continued to strengthen our core supermarket business by opening new stores, updating existing stores, introducing new products, and bringing new trading formats to the market. We've also evolved our fintech business and ShopriteX, the group's tech and innovation hub."

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Mcdonald'S Corp (MCD)

Big Mac? You or a friend 😎 against rising prices, McDonald's sales show resistance against rising prices as consumers continue to spend a buck or two on their favorite meals, despite the increased menu prices. Operating in over 100 countries, McDonald's has more than 38 000 restaurants. 

Like consumers impatiently waiting for the next meal, investors are anxiously waiting for the next earnings report. According to Nasdaq, McDonald’s is expected to have earnings per share of $2.18 for Q1 FY22. This comes after the company outperformed the estimated FY21 earnings by an average of 6% during a 4.35% global inflation rate.

Notwithstanding the inflation rate that rose during the CY21, McDonald's reported a 21% increase in sales. While the US economy was at the forefront of rising prices, sales from the company’s US operations continued to grow, increasing by 7.5% during the fourth quarter, which ended on 31 December 2021. The company's revenue increased by $4 billion during the FY21 to $23 billion, representing a 21% growth. As inflation takes a toll, sales costs increased by $981 million to $12.86 billion. In the fourth quarter of FY21, net income was $1.6 billion, or $2.18 per share. In total, net income for the year was $7.54 billion or $10.04 per share, with a cash and equivalents balance of $4.7 billion. Investments and expansion-related activities for the year were valued at $2.1 billion. 

"While 2021 was a year of continued challenges worldwide, the McDonald’s system came together with unparalleled dedication and delivered truly exceptional performance," McDonald's CEO and President Chris Kempczinski said. He further adds that the FY22 focus remains on creating value for both customers and shareholders and kick-starting the CY22 year with dividends. The company paid EasyVSTRs a dividend of $1.38 per share, after the $5.25 total dividends paid in CY21.

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Woolworths Group Limited (WOW)

From dehydration (market selloff) caused by the global uncertainties, is Woolies giving investors portfolio the Woolies water to keep it going as prices surge?  😎 Woolworths group is an Australian retailer that manages some of the renowned through its Australian and New Zealand food businesses and Big W business. 
As inflation and supply chain factors take a toll on the global retail industry, sales costs increased by 7% during the first half of FY22 vs PCP. Revenue from sales was AU$31.8 billion, representing an 8% increase vs PCP. Aside from the steady in-store sales from the comparative period of AU$26 billion, revenue from resales to other businesses was AU$2.2 billion, and this represented a 203% growth vs PCP. The group's earnings for the half-year were AU$5.71 per share. 

Given its pricing power, the group's food sales through the Australian segment remained steady at AU$23.7 billion during the period, while Australian business to business (B2B) led with a growth of 213% to AU$1.9 billion. This was followed by a 10% increase in the New Zealand food segment. Online sales represented 11% of the company’s turnover, or AU$3.4 billion. Rewarding and returning capital to investors, the group paid out a dividend of $0.39 per share by April. In total, cash expected to be returned to shareholders by FY22 is AU$3.2 billion, including the $2 billion share buy-back from the successful demerger of one of its assets (Endeavour Group Limited). Aside from the sale, the group managed to expand its business by acquiring four businesses during the first half of its FY22. 

Brad Banducci, CEO of Woolworths, said, "While the far-reaching impacts of Covid resulted in one of the most challenging halves we have experienced, we ended H1 strongly with positive trading momentum and helped our customers enjoy a much-needed Christmas celebration and festive holiday season...we made good progress on our strategic agenda by selectively investing in building out our connected customer proposition."

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Informed decision

Given that the companies mentioned above are trading with P/E ratios of 45x, 28x, and 6.6x, respectively, as of writing; with the current rate of inflation, investors are on the lookout for companies with growing earnings. A dip caused by a "fear selloff" or “rebalance” in investment portfolios may present an entry point to lower one’s purchase average, shifting closer to the rising earnings. Other factors to look at may also include PESTLE (political, environmental, social, technological, law, economical) factors, either locally or globally. 

While these companies may show resilience against the current price increases; importantly, with the global dependence shift at our doorstep, we may continue to see prices rising. As a result, this may affect future earnings in the medium to long term, depending on the demand as costs are passed on to consumers in the form of higher prices.

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Sources – EasyResearch, Shoprite Holdings Limited, Woolworths Group Limited, Mcdonald'S Corp, StatsSA, Nasdaq, ASX

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