Where will the Americans spend their next dollar? CEOs get worried

At what point do consumers say that enough is enough when it comes to paying more for goods and services?

The issue is top of mind for C-suite executives, regardless of industry, as inflation rises to levels not seen in decades. And when the earnings season begins, the worries of balancing the rising costs and the consumer too.

“Either companies are going to make a lot less money, or they are going to raise their prices,” RH CEO Gary Friedman said on the company’s earnings call on March 30. “I do not think anyone really understands how high prices are going to go everywhere … I think it will run faster than the consumer and I think we are going to be in a difficult area.”

Consumer prices rose 8.5% compared to March a year ago, according to data from the Labor Department. These data reflect an increase that the United States has not seen since the late 1970s and early 1980s, when core inflation has been the warmest since August 1982. The Producers Price Index, which measures what wholesalers pay, had its largest increase from year to year ever. , an increase of 11.3% in March.

So far in 2022, rising prices have not slowed consumers significantly. Year-over-year retail spending rose 17.6% to February, according to the Department of Commerce, and January spending was revised up to an increase of 4.9%, well above the initial estimate of 3.8%.

The continued strong demand allows many companies to offset the increased pricing they have seen for materials and supply chain costs by passing them on to customers.

Nike increased its expectations for gross margin by at least 150 basis points over the previous year due to “the benefits of strategic pricing,” CFO Matt Friend said in the company’s latest earnings call on March 21.

Conagra reported that its organic sales increased 6% in its most recent quarter, although volume fell 2.6% percent. The reason for that? Price / mix rose 8.6 per cent. CFO Dave Marberger said in the company’s earnings call with analysts on April 7 that the volume decline “was primarily due to the elasticity effects of the price increases.”

A hot labor market, low unemployment, and a historically high savings rate have lifted Americans, making them more willing to pay higher prices for goods and services. But while wages have grown, they have not kept pace with inflation. Real earnings rose 5.6% from a year ago, while real average hourly wages had a seasonally adjusted decline of 0.8% last month, according to data from the Bureau of Labor Statistics.

There are signs that the strength of consumers is weakening, starting with a key earnings reading from the used car market on Monday.

CarMax saw its used cars fall by 6.5% in the most recent quarter, although revenue from used cars rose by 32.6% due to average sales prices rising. The company cited a number of macro factors as to why sales declined, including “declining consumer confidence, the Omicron-driven increase in COVID cases, affordability of cars, and patchwork of stimulus benefits paid in the previous year’s period.”

48 percent of Americans said they think about rising prices all the time, according to a CNBC survey released last week. Furthermore, 75% said they are worried that higher prices will force them to reconsider their economic choices in the coming months.

To fight higher prices, there are several things that Americans say they do. 53 percent said they have cut back on eating out in the past six months, while 35% said they have canceled a monthly subscription and 29% were forced to cancel a trip or vacation.

On top of that, 32% said they have already switched from a branded product to a generic version.

Historically, high-wage earners have been a safe haven for businesses when it comes to continuing to use even through hard times. But even 68% of respondents with an income of $ 100,000 indicated that they are concerned about higher prices that cause them to change economic decisions.

Chipotle Mexican Grill CEO Brian Niccol said on CNBC’s “Closing Bell” on Friday that although the company “continues to see strength in the consumer,” that he thinks “they will continue to be more discriminatory in the future as they decide” how to spend their dollars. “

“Our data tells us that people think twice about how far they want to drive, how often they want to drive; they also think twice about whether they want to spend their dollars on a restaurant experience or an entertainment experience.” said Nicol. “I just think it’s becoming more of a, I would say, conscious decision on how they will choose to spend their next dollar compared to maybe a few months ago.”

Niccol said that Chipotle, which previously said it raised prices by around 6% so far this year, resulting in customers paying around 10% more for their orders than a year ago, has “the pricing power to take the price , when we need it. ” However, he also noted that he “would love not to have to keep taking the prize, but we have to see how everything develops going forward.”

CNBC surveys suggest S&P 500 companies are expected to show earnings growth of 6.4% in the first quarter of 2022 and 6.8% in the second quarter, ultimately leading to around 10% growth in the second half of the year . However, it is largely driven by the energy sector, which is expected to have earnings growth of 233.5% in the first quarter.

By comparison, the grocery and consumer discretionary sectors are projected to have earnings growth of 1.9% and -11.9% in the first quarter, a warning that Covid-era consumer spending and demand may finally hit a wall.

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