Walmart, Kellanova, Inflation, and More!
Editor’s Note: Happy Friday, dear reader. I hope you have a great weekend.
But first, let’s get to it!
BLS Reports Inflation Slowed More Than Expected in July
On Wednesday, the Bureau of Labor Statistics (BLS) set the stage for a Federal Reserve rate cut. The bureau’s monthly Consumer Price Index (CPI) reading for July showed that inflation slowed more than expected last month.
And for the first time in more than three years, the CPI showed growth of less than 3%.
The news came at the right time — two weeks ago, a worse-than-expected initial jobless claims report triggered fears of recession.
With the CPI signaling that the Fed’s anti-inflation measures appear to be working, the central bank can shift gears and hopefully get the labor market growing again. It can do this by slashing its benchmark interest rate when the Federal Open Market Committee (FOMC) — the Fed’s monetary policy-setting committee — meets next month.
Anyway, this week’s CPI reading showed that consumer prices rose by only 2.9% on a year-over-year basis in July. That’s slower than June’s 3% year-over-year increase.
On a monthly basis, consumer prices rose 0.2% — versus a 0.1% decrease in June.
According to Fact Set, economists had been expecting the BLS to report a 3% annual increase and a 0.2% month-over-month uptick.
Stripping out volatile gas and food prices, the so-called “core” CPI rose 0.2% in Jule and 3.2% on a year-over-year basis. That’s the slowest pace recorded since April 2021.
The BLS reported that shelter costs — which include rent plus owners’ equivalent rent, or what a homeowner would theoretically charge to rent their home — accounted for 90% of the CPI’s monthly increase. Shelter costs rose 0.4% from June.
But there are plenty of signs that inflation in housing is starting to improve.
On a year-over-year basis, shelter costs were up 5.1%. That reflected a steady decrease from the peak of 8.2% in March 2023.
Removing shelter costs from the picture, the CPI rose by just 1.7% year over year, according to the BLS.
Food prices showed considerable improvement, with grocery prices rising by just 0.1% and restaurant prices increasing by just 0.2% for the month.
On a year-over-year basis, grocery prices are 1.1% higher, while menu prices were still elevated, rising 4.1%,
Is Walmart a Rare Beneficiary of Inflation?
This earnings season, many consumer-oriented companies such as McDonald’s (NYSE: MCD) and Starbucks (NSDQ: SBUX) have reported that customers are tightening their wallets against inflation. They’ve reported either a decrease in traffic to stores or a drop in the amount of money spent in each transaction — or both.
That’s not the case with Walmart (NYSE: WMT) this time around.
While Americans are cutting back on buying Big Macs and Frappuccinos, they’re apparently still shopping at the retail behemoth’s store and websites.
According to Walmart, sales at U.S. stores open at least one year rose by 4.2% in the second quarter, leading to an increase in operating income of 8.5%.
Meanwhile, digital sales rose by a whopping 22% during the quarter.
As a result of these better-than-expected results, Walmart has upped its sales and profit guidance for the year.
The company now expects sales growth of between 3.75% and 4.75% for the full year, as well as adjusted earnings of between $2.35 and $2.43 per share.
Previously, Walmart had issued guidance for sales growth of 3% to 4% and adjusted earnings per share of $2.23 to $2.37.
Still, Walmart has issued more conservative guidance for the third quarter than what analysts would have liked — at 51 to 52 cents, versus expectations of 54 cents.
According to Chief Financial Officer John David Rainey, Walmart decided not to raise its forecast for the second half of the year, citing geopolitical tensions in the Middle East, the U.S. presidential election, and other situations that may sway consumer sentiment.
“In this environment, it’s responsible or prudent to be a little bit guarded with the outlook, but we’re not projecting a recession,” he said.
Mars Plans $36B Takeover of Kellanova
Shares of Kellanova (NYSE: K) rose this week. The company was spun off by packaged food giant WK Kellogg (NYSE: KLG) only last October.
But now the new company, which makes favorites such as Cheez-Its and Pringles potato chips, is a takeover target for candy colossus Mars.
Family-owned Mars is one of the largest private companies in the U.S. And it’s rolling in dough. Last year, the company — which makes M&Ms, Snickers bars, and Wrigley chewing gum, as well as a multitude of other products — realized net sales of more than $50 billion.
Earlier this year, Mars set a goal of more than doubling its revenue from snack food.
The acquisition of Kellanova should certainly help.
But it won’t come cheap.
Mars is prepared to pay $36 billion for the company — which would make it the largest M&A (merger and acquisition) deal ever in the packaged food industry. It’s even larger than Mars’ $23 billion acquisition of Wrigley back in 2008.
According to a report, Mars will pay $83.50 per share in an all-cash deal for the salty snack giant. That represents a roughly 33% premium to Kellogg’s close on August 2 — the day before Reuters reported that a deal may be under consideration.
The packaged food industry has been troubled by the recent pullback in consumer spending. Americans — and indeed, people around the globe — have been spending less on non-essentials as prices for practically everything remain high.
Alternatively, consumers have switched to cheaper private-label store brands — which also spells trouble for name brands such as Mars and Kellanova.
In addition, the popularity of weight-loss drugs such as Novo Nordisk’s (NYSE: NVO) Wegovy, which works by curbing appetites, has frightened the makers of junk food.
As a result, there’s been a flurry of dealmaking in the industry as packaged food companies look to shore themselves up against these threats.
According to the companies, the deal is expected to be completed in the first half of 2025, at which point Kellanova will become part of Mars’ Snacking unit, which is based in Chicago and led by Andrew Clarke.
Last year, Kellanova’s net sales totaled more than $13 billion.
According to several sources, it’s likely that the acquisition will pass regulatory muster due to there not being much overlap between the two companies’ product lines.
Not All Price Hikes Are Created Equal
Since February 2020 — the last month before the COVID pandemic upended the global economy — prices on goods and services in the U.S. have risen by a whopping 20.9%.
That’s according to the Consumer Price Index for All Urban Consumers (CPI-U).
However, not all product categories have seen the same rate of inflation.
The Consumer Price Index for Transportation, which includes everything from new and used cars to airline fares, has been the fastest-growing category, showing an increase of 27.1% in the last four-plus years.
By comparison, education costs have risen by just 5.2% during the same period.
Take a look:
You will find more infographics at Statista
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