A FedEx employee delivers packages in Recent York, May 9, 2022.
Andrew Kelly | Reuters
After years of unbridled consumer spending on every little thing from home improvement to dream vacations, some firms at the moment are finding the bounds of their pricing power.
Shipping giant FedEx last week said customers have shied away from speedier, pricier shipping options. Airlines including Southwest discounted off-peak fares in the autumn. The likes of Goal and Cheerios maker General Mills have cut their sales outlooks as more consumers watch their budgets.
It is a shift from the recent years when consumers spent at a breakneck pace — and at high prices — lifting corporate revenues to recent records. But faced with weakening demand, more price-sensitive consumers, easing inflation and higher supply, some sectors at the moment are forced to search out profit growth without the tailwind of price hikes.
The reply across industries has been to chop costs, whether it’s through layoffs or buyouts, or just becoming more efficient. Executives have spent the past several weeks selling these cost-cutting plans to Wall Street.
Nike last week lowered its annual sales growth forecast and unveiled plans to chop costs by $2 billion over the following three years. Corporations including Spirit Airlines, hit by a slowdown in domestic bookings and better costs, offered salaried employees buyouts, while toymaker Hasbro announced layoffs of 1,100 employees because it struggles with lackluster toy sales.
Spirit Airlines jetliners on the tarmac at Fort Lauderdale Hollywood International Airport. (Joe Cavaretta/South Florida Sun Sentinel/Tribune News Service via Getty Images)
Joe Cavaretta | South Florida Sun-sentinel | Getty Images
“I feel firms are higher at controlling costs than maintaining pricing power,” said David Kelly, chief global strategist at J.P. Morgan Asset Management.
“Goods firms haven’t got the pricing power they did within the pandemic, and a few within the hotel and travel [industries] — they haven’t got the pricing power they did within the immediate post-Covid,” he added.
Sales growth for firms within the S&P 500 is on the right track to average 2.7% this 12 months, in keeping with mid-December analyst estimates posted by FactSet. That is down from a median of 11% growth in 2022 over the 12 months earlier. Meanwhile, net margins are forecast to fall only barely 12 months over 12 months to 11.6% from 11.9%, FactSet said.
“Corporations are extraordinarily committed to maintaining margins,” said Kelly.
FedEx, for instance, despite its weaker sales forecast, maintained adjusted earnings outlook for its fiscal 12 months that ends May 31. The corporate announced cost-cutting measures last 12 months.
Sector shifts
Consumer spending has largely been resilient, but growth is slowing.
The Mastercard SpendingPulse survey showed holiday retail spending, which excludes auto sales and travel spending, rose 3.1% from Nov. 1 through Dec. 24 of this 12 months over the identical time-frame in 2022, when consumers’ year-over-year retail spending increased 7.6%. Those figures should not adjusted for inflation.
The drag is not felt equally across industries.
Based on the Mastercard survey, restaurant spending rose 7.8% in the course of the holiday period, outpacing overall gains. Executives at Starbucks, for one, say sales are still strong and customers are choosing pricier drinks, fueling sales and profits.
Consumer spending on apparel and groceries rose 2.4% and a pair of.1%, respectively, from the year-earlier period, in keeping with the survey. Spending on jewelry, nonetheless, fell 2.4% and spending on electronics dropped 0.4%, the report showed.
Airline executives have touted robust demand through the summer as travel rebounds from pandemic halts, but fares are dropping from 2022, when capability was constrained by staffing shortages and aircraft delays. The newest inflation report from the U.S. Department of Labor showed airfare declined 12% in November from a 12 months earlier.
Travelers walk with their luggage at John F. Kennedy International Airport in Recent York on Dec. 23, 2023.
Jeenah Moon | Getty Images
Southwest Airlines CEO Bob Jordan told CNBC on the sidelines of an industry event in Recent York earlier this month that the carrier’s fares are still up from last 12 months, despite some discounting during off-peak travel times. The carrier has trimmed its capability growth plans for 2024 and plans to utilize aircraft more during higher demand periods.
“The capability changes next 12 months are all about getting the network optimized to match the brand new demand patterns,” Jordan said. “In some cases, the height and trough [of demand] are farther apart.”
Automakers are also losing their pricing power following years of resilient demand and low supplies of latest vehicles that led to record North American profits for Detroit automakers in addition to foreign-based firms corresponding to Toyota Motor.
Average transaction prices of latest vehicles climbed from lower than $38,000 in January 2020 to greater than $50,000 firstly of 2023 — an unprecedented 32% increase over that point. Prices remain elevated but were down greater than 3.5% through October to roughly $47,936, in keeping with probably the most recent data from Cox Automotive.
“The buyer is unquestionably pushing back,” said Ohsung Kwon, an equities strategist at Bank of America, referring to some prices.
“But we predict the patron is healthy,” he continued. “The balance sheet of the patron still looks phenomenal.”
Spending hangover
There may be plenty to cheer in regards to the state of the U.S. consumer — the job market remains to be strong, unemployment is low and spending has been resilient.
But consumers have also tapped into their savings and racked up bank card debt, with balances reaching a record $1.08 trillion at the top of the third quarter, in keeping with the Recent York Federal Reserve. Bank card delinquency rates are above pre-pandemic levels.
Those dynamics have some consumers pulling back on expenses at a time when firms had already been grappling with spending shifts as pandemic fears eased. Consumers that had spent heavily during Covid lockdowns on things corresponding to home improvement supplies shifted their money to services corresponding to travel and restaurants when restrictions lifted.
While airlines, many retailers and others have forecast a powerful holiday season, the query stays whether consumers will proceed their spending habits in the approaching months, that are typically a low season for shopping and travel, especially as they repay their recent purchases. That would mean a difficult period for firms to push price increases on consumers.
Even when firms cannot raise prices and if sales growth is muted, analysts are still upbeat about earnings next 12 months.
FactSet data shows analysts expect a 6.6% increase in earnings of S&P 500 firms in the primary quarter of 2024 from a 12 months earlier. They forecast a sales increase of 4.4%. Each growth metrics would mark an annual improvement and quarter-on-quarter improvement. Net margins are expected to expand 11.8%.
Bank of America’s Kwon said he expects earnings to enhance even when U.S. economic growth slows due partially to company strategy shifts.
“Corporations are really specializing in what they’ll cut,” he said. “Corporations have overhired and overbuilt capability. They’ve stopped doing that.”
— CNBC’s Michael Wayland contributed to this text.
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