Price Increases Come Easily for Big Businesses, but Inflation Still Squeezes Profits

Others, including furniture maker

MillerKnoll Inc.

MLKN 0.17%

and Olive Garden operator

Darden Restaurants Inc.,

DRI 0.78%

say inflation continues to eat into their profits, as their costs are rising faster than their price increases.

Inflation in the U.S. economy has been running near four-decade highs, prompting the Federal Reserve to raise interest rates in a bid to bring it under control. Prices are rising unevenly across the economy. Consumer prices rose 8.3% in August from a year earlier, while producer prices rose 8.7%, government data show.

“There’s never been a better time to have a conversation with a customer about price increase because they all understand it, because inflation is pretty much across the board,”

John Michael,

an executive at MillerKnoll, told investors last month.

Prices are sticky, economists like to say. Once they go up, customers get used to it, and they rarely come down quickly. If companies’ costs then fall, they can pass along even a little of the savings and keep the rest—customers get a bit of a break and margins still widen.

Corporate profit margins—the difference between expenses and revenue—reached historically high levels in recent quarters, helped by strong consumer demand for a range of goods and services. 

But as more companies prepare to report third-quarter results, there are signs that profits might be under pressure, at least relatively speaking. Excluding the volatile energy sector, analysts expect third-quarter earnings to decline 2.6% from the third quarter of 2020, Refinitiv said.

“It might be a tough quarter for margins,” said

JPMorgan

chief U.S. economist

Michael Feroli.

“I wouldn’t expect a big margin squeeze, but I think it’s going to be tough to expand margins from here.”

Higher prices didn’t widen profit margins at MillerKnoll, which sells furniture such as the Herman Miller line of office chairs. The company said gross margins shrank slightly in the quarter ended Sept. 3, compared with the same quarter last year.

Higher prices added about 3.3 percentage points of gross margin, but higher commodity costs reduced that by about 2.4 percentage points. Transportation pared 0.9 percentage point, and labor inflation and rising overhead reduced it another 0.7 point, executives said. 

MillerKnoll said it has announced list-price increases averaging 8%, taking effect in October. The company is also seeking to reduce costs by $30 million to $35 million a year by offering early retirement to employees and reducing operational and capital spending, among other steps. 

Elsewhere, company margins have widened with price increases. Gravel company Vulcan Materials told investors late last month that it responded quickly to rising costs earlier in the year, in part by increasing prices.

“We got to hit hard in the first quarter with inflation,” Chief Executive

Tom Hill

said during a late-September meeting with investors. The company “went straight to work and reacted with price.”

By May, the company was expanding its margins again, with pricing as well as operational efficiencies, executives said. “We grew [profit margin] more in June, and we’ll grow it more in the third quarter, and more in the fourth quarter,” Mr. Hill said. “We continue to see really good momentum with pricing going into 2023.”

Cintas, which rents and sells uniforms to a range of industries, also used pricing to help widen margins over the past four quarters, despite rising costs, the company told investors on a Sept. 28 conference call.

For the quarter ended Aug. 31, the company held on to 47.5% of sales for its rental business after deducting the cost of providing the service, a measure called gross margin.

“That’s a really good gross margin for us—we’ve only been higher than that a few times, and that certainly is a much greater gross margin than we saw prepandemic,” finance chief

Michael Hansen

told investors. 

Price increases contributed to those gains, with bigger increases than normal to go along with bigger cost increases than normal, executives said. As costs decline, the company is likely to return to past pricing patterns, they added. Sales growth and improvements in productivity have also contributed, a Cintas spokeswoman said.

Some companies are feeling the squeeze now, but are looking ahead to improvements.

Darden, which operates such restaurant chains as Olive Garden and LongHorn Steakhouse, said that profit margins for its fiscal first quarter, which ended Aug. 28, declined from last year, but the company expects margins to remain above prepandemic levels. Measured price increases have helped, executives said.

“We’re seeing the ability as we take price in some of the fine-dining brands, there’s really no pushback,” CEO

Rick Cardenas

said during a call with analysts. 

Darden kept its price increases below inflation for its market—raising prices about 7.5% over the past two years, compared with a 14% increase in a federal measure of inflation at full-service restaurants, the company said. Executives said they have seen little falloff in demand from the company’s customers as a result.

Darden expects inflation in its own costs to run about 1 percentage point ahead of its price increases over the course of its full fiscal year, ending in late May, the company said. The gap will narrow as commodity prices come down and should improve with productivity gains, including from simplifying menus and processes, company officials said.

“As we look at the full year, do we still expect restaurant-level margins to be better than pre-Covid? Yes,” Darden finance chief

Raj Vennam

said.

Write to Theo Francis at [email protected]

Others, including furniture maker

MillerKnoll Inc.

MLKN 0.17%

and Olive Garden operator

Darden Restaurants Inc.,

DRI 0.78%

say inflation continues to eat into their profits, as their costs are rising faster than their price increases.

Inflation in the U.S. economy has been running near four-decade highs, prompting the Federal Reserve to raise interest rates in a bid to bring it under control. Prices are rising unevenly across the economy. Consumer prices rose 8.3% in August from a year earlier, while producer prices rose 8.7%, government data show.

“There’s never been a better time to have a conversation with a customer about price increase because they all understand it, because inflation is pretty much across the board,”

John Michael,

an executive at MillerKnoll, told investors last month.

Prices are sticky, economists like to say. Once they go up, customers get used to it, and they rarely come down quickly. If companies’ costs then fall, they can pass along even a little of the savings and keep the rest—customers get a bit of a break and margins still widen.

Corporate profit margins—the difference between expenses and revenue—reached historically high levels in recent quarters, helped by strong consumer demand for a range of goods and services. 

But as more companies prepare to report third-quarter results, there are signs that profits might be under pressure, at least relatively speaking. Excluding the volatile energy sector, analysts expect third-quarter earnings to decline 2.6% from the third quarter of 2020, Refinitiv said.

“It might be a tough quarter for margins,” said

JPMorgan

chief U.S. economist

Michael Feroli.

“I wouldn’t expect a big margin squeeze, but I think it’s going to be tough to expand margins from here.”

Higher prices didn’t widen profit margins at MillerKnoll, which sells furniture such as the Herman Miller line of office chairs. The company said gross margins shrank slightly in the quarter ended Sept. 3, compared with the same quarter last year.

Higher prices added about 3.3 percentage points of gross margin, but higher commodity costs reduced that by about 2.4 percentage points. Transportation pared 0.9 percentage point, and labor inflation and rising overhead reduced it another 0.7 point, executives said. 

MillerKnoll said it has announced list-price increases averaging 8%, taking effect in October. The company is also seeking to reduce costs by $30 million to $35 million a year by offering early retirement to employees and reducing operational and capital spending, among other steps. 

Elsewhere, company margins have widened with price increases. Gravel company Vulcan Materials told investors late last month that it responded quickly to rising costs earlier in the year, in part by increasing prices.

“We got to hit hard in the first quarter with inflation,” Chief Executive

Tom Hill

said during a late-September meeting with investors. The company “went straight to work and reacted with price.”

By May, the company was expanding its margins again, with pricing as well as operational efficiencies, executives said. “We grew [profit margin] more in June, and we’ll grow it more in the third quarter, and more in the fourth quarter,” Mr. Hill said. “We continue to see really good momentum with pricing going into 2023.”

Cintas, which rents and sells uniforms to a range of industries, also used pricing to help widen margins over the past four quarters, despite rising costs, the company told investors on a Sept. 28 conference call.

For the quarter ended Aug. 31, the company held on to 47.5% of sales for its rental business after deducting the cost of providing the service, a measure called gross margin.

“That’s a really good gross margin for us—we’ve only been higher than that a few times, and that certainly is a much greater gross margin than we saw prepandemic,” finance chief

Michael Hansen

told investors. 

Price increases contributed to those gains, with bigger increases than normal to go along with bigger cost increases than normal, executives said. As costs decline, the company is likely to return to past pricing patterns, they added. Sales growth and improvements in productivity have also contributed, a Cintas spokeswoman said.

Some companies are feeling the squeeze now, but are looking ahead to improvements.

Darden, which operates such restaurant chains as Olive Garden and LongHorn Steakhouse, said that profit margins for its fiscal first quarter, which ended Aug. 28, declined from last year, but the company expects margins to remain above prepandemic levels. Measured price increases have helped, executives said.

“We’re seeing the ability as we take price in some of the fine-dining brands, there’s really no pushback,” CEO

Rick Cardenas

said during a call with analysts. 

Darden kept its price increases below inflation for its market—raising prices about 7.5% over the past two years, compared with a 14% increase in a federal measure of inflation at full-service restaurants, the company said. Executives said they have seen little falloff in demand from the company’s customers as a result.

Darden expects inflation in its own costs to run about 1 percentage point ahead of its price increases over the course of its full fiscal year, ending in late May, the company said. The gap will narrow as commodity prices come down and should improve with productivity gains, including from simplifying menus and processes, company officials said.

“As we look at the full year, do we still expect restaurant-level margins to be better than pre-Covid? Yes,” Darden finance chief

Raj Vennam

said.

Write to Theo Francis at [email protected]