The last three months have been very critical from a risk perspective. Geopolitical outrage has escalated since Russia invaded Ukraine in February. The controversy has pushed up global food and energy prices. Inflation was hot, with the consumer price index rising 7.9% year-on-year in February, the biggest increase since January 1982. Meanwhile, the Federal Reserve recently raised interest rates for the first time since 2018.
All of these consequences indicate unfavorable conditions for business operations.
With this in mind, there are two trends to watch as companies announce earnings in the coming weeks.
Is demand still strong?
When uncertainty is high and sentiment is low, it is prudent for businesses and consumers to cut costs.
But that has not been the case in recent quarters, with rapid inflation and the COVID-19 variety presenting new health risks.
Earlier this week, Nike announced better-than-expected quarterly sales growth, stating that "with the healthy bridge market, demand is much higher than the inventory supply available in our geographical areas."
In other words, Nike (NKE) says sales would have been stronger had it not been for the supply problems that most companies have mentioned in the last quarter.
On Thursday, parent, quarterly same-restaurant sales of Dorden Restaurants (DRI), Olive Garden, Longhorn Steakhouse and other well-known restaurant brands rose 38% year-over-year.
When asked about the impact of the Petro price hike, Dorden's CEO Jean Lee told Yahoo Finance, "I think the consumer balance sheet is stronger than ever."
In fact, consumer credit levels are low and liquidity levels are very high.
In terms of inflation, General Mills (GIS) is raising prices to address the high costs. And in its earnings statement on Wednesday, the company confirmed that customers are paying. In fact, sales of high-value products during this period drove all of the company’s revenue growth, which actually saw the pound volume decline.
Based on these preliminary reports, it appears that the revenue has been redistributed.
Have profit margins stagnated?
Over the past year, corporate executives have become increasingly vocal about how inflation can increase business spending.
However, profit margins actually rose to record levels in 2021. And analysts predict that margins will be higher in 2022.
In addition to its earnings announcement, Nike reported that its gross profit margin increased to 46.6% for the three months ended February, up 100 basis points compared to the previous quarter.
Despite the high price, General Mills really saw its profit margin deal.
Dorden reported better profit margins, but management also warned that the price of inflation was much higher than previously expected.
Why is that important
As you can see in the chart below, revenue and profit margin are key drivers for revenue growth. And revenue growth drives stock prices.
