Two Critical Trends to Watch When Companies Announce Earnings: Morning Brief

Two Critical Trends to Watch When Companies Announce Earnings: Morning Brief

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Friday, March 25, 2022

Believe it or not, the first trimester ends in a week from today. This means that the first quarter earnings season is fast approaching.

The past three months have been particularly eventful from a risk perspective. Geopolitical angst reached its climax in February with The Russian invasion of Ukraine. The conflict sent food and soaring energy prices. Inflation is high with the consumer price index jump 7.9% year-over-year in February, the largest increase since January 1982. Meanwhile, the Federal Reserve recently rising interest rates for the first time since 2018 in its continued effort to cool prices.

All of these developments represent headwinds for business activity.

With that in mind, there are two trends to watch as companies report earnings in the coming weeks.

Is the demand still strong?

When uncertainty is high and the feeling is lowit would make sense for businesses and consumers to cut spending.

But this does not occur in recent quarters, despite rising inflation and Variants of COVID-19 presenting new health risks.

Earlier this week, Nike announced quarterly sales growth above expectations while adding that “Demand continues to significantly exceed available inventory supply, with a healthy pull market in all of our geographies.”

In other words, Nike (NKE) says sales would have been even more robust had it not been for the supply issues, which was something. many companies said about the previous quarter.

On Thursday, Darden Restaurants (DRI) – parent company of Olive Garden, LongHorn Steakhouse and other popular restaurant brands – reported quarterly sales at the same restaurants that jumped 38% from a year ago.

Asked about the impact of soaring gasoline prices, Darden CEO Gene Lee told Yahoo Finance, “I think the consumer bottom line is stronger than it was before.”

In fact, the consumer debt levels are low and cash levels are very high.

With respect to inflation, General Mills (GIS) raised prices to meet higher costs. And in its earnings announcement on Wednesday, the company confirmed that consumers are paying. In reality, sales of more expensive products have led all of the company’s revenue growth over the period, which actually saw book volume decline.

Based on these early reports, it looks like revenue could once again be generated.

Are profit margins holding up?

During the past year, business leaders have been very vocal about how inflation was driving up the cost of doing business.

However, profit margins have actually widened to record levels in 2021. And analysts predict that margins would remain high in 2022.

With the announcement of its results, Nike said its gross profit margin increased to 46.6% in the three months to February, up 100 basis points from the previous quarter.

Despite higher prices, General Mills actually saw its profit margins shrink.

Darden reported better profit marginsbut management also warned that the costs of inflation were much higher than they had previously expected.

“We started the [fiscal] year with a 3% inflation assumption,” said Darden COO Rick Cardenas. “Here we are three quarters later. We are looking at headline inflation of 6%.

So far, companies are painting a mixed picture of margins.

why is it important

Revenues and profit margins are the main drivers of earnings growth, as you can see in the chart below. And earnings growth boosts stock prices.

S&P 500 operating EPS annual growth

Analyst earnings forecasts are high and have only gotten better.

It will therefore be essential for companies to generate revenue and/or profit margins, otherwise they could be punished by traders who sell their inventory.

By Sam Ro, author of Follow him on Twitter at @SamRo.

What to watch today


  • 10:00 a.m. ET: While waiting for door-to-door sales, February m/m (1.0% expected, -5.7% in Jan)

  • 10:00 a.m. ET: University of Michigan Sentiment, March final (59.7 expected, 59.7 in February)



  • President Biden is set to travel less than 70 miles from Ukraine today with a visit to Rzeszów, Poland on the agenda. He will receive a briefing on the refugee crisis and will also meet with US military personnel stationed there.

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US and EU strike LNG deal as Europe seeks to cut off Russian gas [Reuters]

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