Investors Focused on Retail Sales and Wages
$WMT, $M, $MCD, $AMZN, $CMG
Amidst overall strong Quarterly results, rising labor costs are a growing concern, with more than 12 companies in the S&P 500 mentioning them in conference calls so far this earnings season.
Next week, several retailers including Walmart (NYSE:WMT) and Macy’s (NYSE:M) are due to report results and investors will be keen to hear what they say about labor.
Retailers and restaurants tend to have large employee bases and are expected to be among companies most likely to feel the biggest impacts of higher wages.
Morgan Stanley (NYSE:MS) strategists wrote in a note this week that hotels, restaurants, retailers, energy equipment and services, and IT services may be among industries most exposed to rising wages.
Wage pressures have been building for some time, but we finally saw them really spike … in the October jobs report, so we believe that is going to continue to be an issue.
Worries about the potential for wage inflation have been picking up as economic data has shown that US labor market conditions are tightening.
Wage pressures could increasingly be an issue as EPS growth for S&P 500 companies is expected to slow to about 9% next year following Y 2018’s tax-fueled earnings gains, estimated at 24%, according to the data.
In the recent US jobs report for October, wages recorded their largest annual gain in 9.5 years.
A separate report showed the Employment Cost Index (ECI), the broadest measure of labor costs, increased 0.8% in Q-3 after a 0.6% rise in Q-2, putting the Y-Y rate of increase at 2.8%.
A record 7.14-M open jobs are unfilled, and employers have been forced to boost wages to attract employees.
Online retailer Amazon.com (NASDAQ:AMZN) said last month it would raise its minimum wage to $15/hour for US employees starting in November.
Among companies that have talked about the impact of higher wages, McDonald’s (NYSE:MCD) CFO said on the company’s 23 October call with analysts that labor costs were among pressures on margins in the latest Quarter.
Chipotle Mexican Grill (NYSE:CMG) CFO told analysts the company expects labor costs to keep rising in Q-4, and Clorox Co executives said wage inflation has been higher than anticipated.
The Trump tax overhaul passed by Congress in late Y 2017 has helped companies offset a lot of extra expenses, and Q-3 S&P 500 profit growth is on track to be the highest since Y 2010.
We believe that, lower tax rates should enable higher wages and maintainable margins without the need to raise prices.
Goldman Sachs (NYSE:GS) strategists in a recent note said wage inflation is among Key risks to S&P 500 profit margins, along with higher tariffs and rising debt costs.
“Managements expressed confidence in their ability to offset tariff costs through price increases or supply chain reorganization. However, executives noted increased competition for labor and intensifying wage pressures,” Goldie wrote to their clients.
Some businesses, especially retailers, may need to pass along higher labor costs to maintain slim profit margins. Because, when salaries rise to levels that would cause inflation, then that could negatively impact earnings growth.
Have a terrific weekend