MMM 3M’s drop-off in mask sales adds to lingering supply chain issues that have battered the company (157.06 -2.48)
Already facing supply chain issues across many of its business lines, Dow component 3M (MMM) is now contending with another significant headwind: namely, sharply declining mask sales. As the highly-contagious Omicron variant spread in late 2021, sales of MMM’s N95 masks reaccelerated, providing a boost to its better-than-expected 4Q21 report. For context, CFO Monish Patolawala commented during the earnings conference call that MMM’s respirator business came in $40 mln better than anticipated. Since that earnings call on January 25, however, new virus cases have plunged and many states, businesses, and schools are dropping their mask mandates.
Due to the volatility and uncertainty surrounding the supply chain and COVID-29 situations, MMM refrained from providing FY22 guidance when it reported 4Q21 results. Now, it appears that MMM has better visibility, but its outlook is a bit tepid with the company guiding for FY22 EPS of $10.15-$10.65 on revenue growth of just 1-4%. The midpoint of both of these guidance ranges are essentially inline with expectations, so the news could be worse. In fact, considering that eroding demand for masks created a $0.45/share hit to MMM’s FY22 EPS guidance, the forecast paints a more positive picture for its other businesses.
However, the company’s update isn’t going over very well with investors, likely for the following reasons:
The speed and the severity of the drop-off in respirator sales may be catching some people off-guard. Less than a month ago, MMM reported that strengthening respirator sales played a key role in its Q4 outperformance.
There’s a sense that the company is continually putting out fires, preventing it from generating stronger results. Prior to this mask issue, MMM dealt with falling sales in its Consumer segment due to the work-from-home shift. Rewinding a bit further, COVID-19 wreaked havoc on its Transportation & Electronics segment as auto OEMs idled plants to slow the spread of the virus.
Today, COVID-19 is still impacting the Transportation & Electronics segment, but in a different way. Specifically, chip shortages and logistical bottlenecks are causing auto OEMs to cut production, rippling through to MMM.
MMM is also dealing with raw material inflation, adding more pressure onto its margins. In Q4, its operating margin slid by 240 bps yr/yr to 18.8%.
Meanwhile, in the background, MMM’s ever-present legal troubles continue to hang over the company. A majority of the litigation against the company stems from environmental claims due to its use of PFAS chemicals. According to a Bloomberg report, settlements for PFAS-related cases alone may total over $20 bln.
It doesn’t come as a surprise that mask sales are on the decline, although seeing the exact financial impact of the drop-off makes the situation hit home for investors. In isolation, the decrease in mask sales isn’t overly alarming since it’s been anticipated for a while. However, it adds to an already mixed picture for MMM as it contends with supply chain disruptions, inflation, and litigation troubles.