More companies hit with drag on profits
Costs seen rising faster than revenue
Corporate profits have withstood raging inflation over much of the past year, but those good times may be ending.
Profits stayed fat even as companies’ costs rose, thanks to one simple trick: Businesses boosted the prices they charged customers by more than their own costs rose.
Now, however, more companies are seeing costs rise faster than revenue. In the parlance of financial executives, their margins are getting squeezed, and that’s acting as a drag on profits. But, overall, corporate profits remain near record highs.
Companies in the S&P 500 are in the midst of reporting overall growth of roughly 2% for the summer from a year earlier. Many companies also say they still have the power to hold the line on prices for their products, if not to raise them further.
But some signs of stress are beginning to show, and analysts say even faster margin declines may be on the way given how fragile the economy appears.
Consider Lyondell-Basell Industries, an international chemical company. Its chief financial officer recently said the company saw margins get squeezed last quarter “across all segments due to rising costs and weaker global demand.”
Coffee giant Starbucks, meanwhile, was one of the many companies that successfully pushed through price increases over the past year with no drop-off in customer loyalty or transactions.
But when executives earlier this month discussed their latest results, interim Starbucks CEO Howard Schultz said, “We’re certainly not going to try and raise prices during this time.”
Profit margins for S&P 500 companies during the summer appear to have dipped to 11.9%, according to FactSet. That essentially means the companies profited $119 from every $1,000 in sales. That’s down from $122 three months earlier and from $129 a year earlier, but still above the average of $113 over the past five years.
One of the biggest reasons for the fall in margins is the rise in pay that workers have won recently. Total compensation for workers in the private sector rose 5.2% in the summer from a year earlier.
“The combination of sticky wage costs and slowing end market/consumer pricing has been evident in recent macro data and loudly signals margin pressure,” strategists at Morgan Stanley wrote in a recent report.
The strategists forecast an 11% decline in profits at S&P 500 companies next year.