| On the surface, this earnings season has produced solid sales numbers for many companies. However, we believe there is more than meets the eye when looking more closely at the reports. A few examples per 2Q2022 Earnings Reports: |
- Proctor & Gamble – Solid revenue growth but driven by higher prices on fewer units sold.
- Mastercard – Seeing stable consumer spending but the mix has shifted from goods (discretionary spending) to gas/groceries (spending on necessities).
- CarMax – Net revenue growth of 21% but sold 5.5% fewer units.
| The picture being painted is that although revenue numbers look strong, much of that strength is predicated upon a company’s ability to raise prices as actual unit demand falls. With the unemployment rate below 4%, consumers can absorb higher costs while also relying on a drawdown in their savings and an increase in credit card usage. We believe companies may find it difficult to continue to offset falling unit demand with higher prices…especially if unemployment begins to rise as economic growth slows. U.S. initial unemployment claims continue to trend higher, often a signal of more trouble ahead for the labor market. Initial claims are up 55% since their bottom in March – much faster than seen before prior recessions. This is a key data series to watch relative to not only the overall economy but also the sustainability of corporate revenues. |
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