Inflation Rears Its Head

Earnings: inflation rears its head, compressing margins at big users of raw materials. My prior reported noted strength in the luxury retailers—but let's look at the other side of the coin today—the middle market, particularly home improvement, continues to see terrible results. And one reason margin is under pressure is inflation.

Take building products company Masco—think cabinets (KraftMaid), plumbing products (Delta faucets), and paints (Behr). They reported earnings about in line with expectations, but sales were weak. Look how raw material inflation is affecting them: titantium dioxide prices are high, impacting paints (they are trying to raise prices)...Plumbing is getting hit by higher copper prices...and higher wood prices are impacting the Cabinet business, already hit by weak home sales (sales were down 18 percent).

Similar story at Sherwin Williams, which also reported weak numbers today. How weak? Revenues at the consumer group (sales to retailers) were up 3 percent year-over-year against an easy compare, a big deceleration from the up 12 percent in the second quarter. Paint store sales (60 percent of sales) increased 5.4 percent on higher pricing, but it was up 6.4 percent in the prior quarter.

As with Masco, sales are continuing to be hurt by the weak construction market, and now higher raw materials costs are hurting margins. They too are trying to raise prices in places like paint, but it remains to be seen how much can be passed along.

The company lowered the top end of its full year guidance (to $4.12-$4.22 from $4.12-$4.52).

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