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Consumers in for higher prices as costs surge

Consumers in for higher prices as costs surge
NEW YORK/ATLANTA (Reuters) - Expect to pay more to blow your nose or change a diaper.

By Nicole Maestri and Karen Jacobs - Analysis

With oil prices soaring, more U.S. consumer product makers could join Kimberly-Clark Corp (KMB.N: Quote, Profile, Research, Stock Buzz) and Newell Rubbermaid Inc (NWL.N: Quote, Profile, Research, Stock Buzz) in issuing profit warnings or raising prices as they work to offset the surging costs of energy and raw materials.

Late on Monday, Kimberly-Clark, which makes Kleenex tissues and Huggies diapers, cut its full-year outlook and said it might boost prices as energy costs pressure its margins.

On Tuesday, Newell Rubbermaid, whose products include Sharpie markers and Rubbermaid storage containers, cut its full-year profit outlook and said it would exit some product lines and raise prices due to higher plastics costs.

Companies that make the products U.S. consumers use everyday -- such as paper towels, toilet paper and plastic bags -- could now also be facing the prospect of having to raise prices even more or watch margins deteriorate.

"It's a tough circumstance, but one that's unavoidable today," Newell Rubbermaid Chief Executive Mark Ketchum said in an interview.

"The pricing that you're seeing, whether from the food companies or the paper companies like Kimberly-Clark or us, are prices that just have to be passed on. Costs are "too extraordinary not to do that."

Lehman analyst Lauren Lieberman said in a note that oil and natural gas prices have spiked since many companies last gave commodities outlooks in April and May.

"Traditional ways of thinking about cost inflation appear badly broken in this environment, and we would not be surprised to see other (cosmetics and household products) manufacturers (Colgate-Palmolive Co (CL.N: Quote, Profile, Research, Stock Buzz), Procter & Gamble Co (PG.N: Quote, Profile, Research, Stock Buzz), Clorox Co (CLX.N: Quote, Profile, Research, Stock Buzz)) trade off in anticipation of similar guidance revisions," she added.


Consumer product makers have been trying to rein in overhead expenses as an unprecedented rise in oil boosts costs for raw materials such as resin, which is used in packaging and plastics. To cope, many manufacturers have raised prices.

But those price increases cannot always keep pace with the surge in oil. Crude oil has risen from $20 a barrel in January 2002 to a peak of $147.27 last week, meaning the cost of doing business, from running a factory to shipping items across the globe, is increasing.

Kimberly-Clark said second-quarter cost inflation was $50 million higher than estimated, driven by the escalation in energy prices and oil-based raw materials.

Chief Executive Thomas Falk said that, near-term, margins are expected to remain under pressure.

"The reality is that the cost environment has changed dramatically and very quickly in 2008," Falk said. "The rise in commodity costs has outpaced our ability to offset inflation in the near term with price increases and other actions."

In the next six weeks, the company will implement its second price increase of the year across most of its U.S. consumer brands.

Newell, which had total sales of $6.4 billion in 2007, will sell off, cut back or close down about $500 million in sales of selected consumer product categories, focusing on the most resin-intensive product areas.

It now expects full-year earnings of $1.40 to $1.60 a share, down from an April forecast of $1.80 to $1.90.

"The low end of our guidance ... is to anticipate that possibility, of oil going from $145 today to creeping up to $200 by the end of the year," Ketchum said. "We're covering for a fairly pessimistic case."

The company plans to raise prices in the second half of this year, with some increases as high as 22 percent.

The cost inflation "has been unprecedented this quarter," said Morningstar analyst Lauren DeSanto. "These companies are under some very serious pressure and I'm not sure how much that's really going to abate and how quickly. I don't think they know."


Following the Kimberly-Clark and Newell announcements, Colgate-Palmolive, which makes Colgate toothpaste and pet products such as Hill's Science Diet, sought to reassure investors by saying it would meet or exceed external expectations for second-quarter sales and profit.

Procter & Gamble, which makes Charmin toilet paper and Tide detergent, affirmed its earnings and sales outlook for its fiscal fourth quarter.

Late on Tuesday, Clorox, which makes its namesake bleach and Glad plastic bags, tweaked its full-year earnings forecast. It now expects earnings per share in the range of $3.22 to $3.25, compared with its earlier view of $3.20 to $3.28.

BMO Capital Markets analyst Connie Maneaty said some consumer product companies, such as Procter & Gamble, have a portfolio that includes products, such as cosmetics and fragrances, that are not as vulnerable to the recent surge in commodity prices. But others, such as Clorox, whose Glad bags require resin, are more exposed.

"The market is worried about companies that have to buy raw materials to make the products they sell," she said.

No matter what their exposure is, Maneaty said consumers can expect to see higher prices on store shelves as manufacturers look to battle the inflationary environment.

"I think it's fair to say that very few companies will be increasing their guidance in this environment," she said. "I think every company needs to raise its outlook or will raise its outlook for inflation."

(Additional reporting by Martinne Geller in New York; Editing by Andre Grenon)

source: REUTERS

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