Sherwin-Williams (SHW) Cuts Guidance As It Struggles To Cover Rising Costs, Raw Material Shortages
1:23 pm Wednesday, September 08th, 2021
Since Sherwin-Williams (NYSE:SHW) reported upside Q2 results in late July, the supply chain and inflationary headwinds that it has been navigating through have become fiercer. At that time, the company believed that raw material availability would improve during the second half of the year, enabling it to provide strong Q3 net sales guidance of mid-to-high single digit growth. With the situation having worsened, partially due to the negative impact caused by Hurricane Ida, SHW lowered its Q3 outlook this morning, forecasting net sales to be up or down by a low-single digit percentage.
SHW is contending with more than just supply shortages. In addition to rising raw material costs, transportation and labor expenses are also climbing higher. To help offset these cost pressures, the company announced a 4% surcharge in The America’s Group effective September 20 through the rest of the year. This action follows a 7% price bump across all segments introduced last quarter, which followed a 3-4% increase in the U.S. and Canadian markets in February.
Clearly, the company is having some trouble keeping up with inflation. So far, SHW has been able to effectively pass along the spiraling costs to its customers as demand remains healthy, especially in the new home construction and industrial markets. Despite the challenges to fully meeting demand, the Performance Coatings Group, which serves the automotive industry, is still expected to generate high-teens percentage growth. That guidance is only a modest revision from SHW’s original projection of high-teens to low-twenties percentage growth.
However, the company noted last quarter that the do-it-yourself (DIY) market experienced a double-digit yr/yr decline. Unfavorable yr/yr comparisons were mainly to blame as home painting projects returned to more normalized levels after last year’s boom. The company is now modeling The America’s Group and its ~4,800 retail stores to report Q3 sales that are up or down on a low-single digit basis. While that represents a significant downgrade from the original outlook of mid-to-high single digit growth, we worry that the combination of sizable price increases, raw material shortages, and labor constraints will create persistent headwinds that extend beyond Q3.
On that note, SHW did reaffirm its FY21 adjusted EPS guidance of $9.15-9.45. Whether the company reaches that guidance will depend upon consumers’ willingness to take on even higher prices, the ability of the housing market to sustain its strength, and a stabilization in the supply chain. Overall, SHW has performed very well in a difficult environment, but the challenges only seem to be intensifying.
