August 31, 2006 in Business

Higher prices ahead

Dan Sewell Associated Press
Associated Press photo

Mary Ann Ray, left, holds her daughter Marisa, 5, as her son Ethan, 2, gets a haircut by stylist Bev Sears at Cookie Cutters children’s hair salon last week in Batavia, Ohio. While rising prices at the gas pumps have gotten the most attention, increases are also pulling at pocketbooks from a variety of directions.
(Full-size photo)

Costco adjusts outlook

SEATTLE – Costco Wholesale Corp. said Wednesday it expects fourth-quarter profit to be below analysts’ estimates, as sales on items like jewelry and furniture slowed and the company struggled with higher gas prices. The warning sent Costco shares down more than 4 percent.

The Issaquah, Wash.-based wholesale club said it expects to earn between 68 cents and 71 cents per share for its quarter ending Sept. 3, which takes into account a one-time tax charge of about 3 cents per share.

Without the charge, Costco said it expects to earn between 71 cents and 74 cents per share. Analysts polled by Thomson Financial had been expecting earnings of 77 cents per share, on average.

In a conference call Wednesday with analysts, the company said profits on its gas sales were a factor in the reduced forecast but noted that it wasn’t the only issue.

Costco Chief Executive Jim Sinegal said customers also appeared to be wary of buying discretionary items such as furniture and jewelry, perhaps in part because of the pain they are feeling when they go to the pump. Still, Sinegal said, other areas, such as toy sales, were doing well.

Analyst Bob Toomey with E.K. Riley Advisors blamed the reduced expectations on the economy.

“I think it’s just an adjustment to slower consumer spending. I don’t think it’s any problem with Coscto’s execution or their model. It’s just the economy, in my view,” he said.

Associated Press

CINCINNATI – The ripple effect into the everyday economy as big companies try to offset increased costs for energy, transportation and raw materials is a creeping inflation that economists are watching as the Federal Reserve balances inflation concerns against a slowing economy. While recent economic data indicated that inflation pressures are easing, consumer surveys show inflation worries are contributing to declining confidence about the economy.

And more price increases are coming.

In summer earnings reports, company after company has reported plans to pass along some of their higher costs in pricing of some or most of their products, from Energizer Holdings Inc.’s batteries to Eastman Kodak Co. film; Whirlpool Corp. appliances to Clorox Co. household cleaners; Anheuser-Busch Cos. Inc. beer to meals in some Buffalo Wild Wings Inc. restaurants.

Some small-businesspeople are feeling the ripples, too.

“My costs have gone up. Shipping has definitely gone up,” said Toni Sander, who sells gourmet foods and coffees, gift baskets and fine wines at her store, The Wine List, in the northern Cincinnati suburb of West Chester. “Shipping bills are half the cost of some of the food orders.”

The federal Labor Department reported a July core consumer inflation increase of 0.2 percent, the lowest in five months. But core inflation, which excludes energy and food, has risen by 2.7 percent over the past 12 months.

Jay McIntosh, Chicago-based Americas director for retail and consumer products for Ernst & Young, said while the costs of gasoline, health care costs, college tuition and other areas have been rising steadily for years, some everyday items are climbing now, too.

“I think consumers are feeling it a little more day to day,” McIntosh said. He said that large companies that have kept prices down by cutting back internally or increasing productivity are facing increasing pressure because of spiraling energy and commodity prices fueled partly by growing consumption by China.

“It seems like right now, it’s a little bit more difficult to keep from raising prices,” McIntosh said.

James Brock, a Miami University economics professor, said “the $64,000 question” is how much longer companies can keep rising costs from spilling heavily into the consumer marketplace.

“This has been somewhat of a mystery so far, and something (policymakers) are struggling with,” Brock said. “The question is, when does that really start to show up at the retail level and the cash register? Big companies like Procter & Gamble can make modifications in the ways they do things to keep the lid on prices. Honestly, I’ve been surprised that it hasn’t shown up more than it has.”

Mary Ann Ray, a registered nurse and mother of two from suburban Union Township, Ohio, said her family is already seeing inflation eat away at their earnings. “We see it daily as far as everything we need for the kids, groceries, the little one still in diapers, anything that has to do with the house,” she said. “It’s all the little things.”

Clayt Daley, chief financial officer of Procter & Gamble Co., said during an Aug. 2 conference call that the consumer products company has at times adjusted its spending in areas such as promotions while monitoring what the competition does with prices.

“Competitors have had the same issues on costs … we have had, I think, pretty orderly price increases in most of our businesses around the world during this upswing in commodity and energy prices,” Daley said.

P&G cited increased pulp and natural gas costs on Bounty paper towels and Charmin toilet paper and high zinc costs for Duracell batteries in raising prices around 6 percent on those products this year, for example.

Executives of Kellogg Co., maker of popular cereals such as Rice Krispies and frozen foods such as Eggo waffles, told analysts July 27 that the company is absorbing $180 million this year in additional costs, mainly for energy, sugar and wheat. While strong sales growth helped boost Kellogg’s second-quarter profit by 3 percent, the company said it needed to boost some prices.

“Obviously, as we see the impact of this particular cycle of cost inflation, we believe in pricing and we are pricing against that to help sustain our business model,” said Jim Jenness, Kellogg’s chairman and chief executive officer.

While some price increases announced this summer, such as airline fares, took effect immediately, shoppers will see others, such as Kellogg’s, going up on store price tags late this year or early next year.

“They (consumers) will have to cut back on something,” said Brock, the economics professor. “Then you raise the bigger question of, OK, if that happens, will that create a slump in the economy?”

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