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What are McDonald’s, Google and LVMH telling us about the economy?

Higher costs, advertising signal recession risk
Some of the world's biggest companies including Mcdonald's, Alphabet and LVMH released quarterly earnings last week. Here are four takeaways for investors.

Some of the world’s biggest companies including Mcdonald’s, Alphabet (parent company of Google) and LVMH released quarterly earnings last week. Here are four takeaways for investors.

Higher costs are eating margins

Australia recorded an inflation of 6.1 per cent last week, the highest level since the GST was introduced in 2000. Over the US, it’s a more grim outlook. McDonald’s announced US food and paper inflation of 12-14 per cent, which will likely peak in the next quarter before retracing. Labour constraints are also an issue, with management expecting a 10 per cent per cent increase in employee costs. Internationally, the outlook is more dire. War in Europe is creating uncertainty over how long and to what extent inflation persists.

  • It’s a similar story for consumer brand giant Unilever. Sales increased 8.8 per cent in the second quarter, but this was entirely due to price rises of 11.2 per cent across its products. Volume actually declined 2.1 per cent, implying customers are trading down to cheaper substitutes. Subsequently, its profit margin fell by 9%. The key question for companies is how far can prices rise until customers go elsewhere. Unless the goods or service is essential, it’s likely margins continue to be eroded.

    No slowing the top 1 per cent

    The US has entered a technical recession, Europe is in disarray and China can’t escape lockdowns. But you wouldn’t know it by looking at LVMH. The luxury goods conglomerate achieved a 28 per cent increase in sales and a 34 per cent uplift in profit in the first half of 2022. Keep in mind that’s on top of the prior 56% and 44% achieved in 2021.

    When asked about the potential of a global recession, management acknowledged it would be impacted but explained that the cost base is largely variable. Costs like selling and marketing can be dialled up and down. As for inflation, price increases of between 3-8 per cent were passed through.

    “Over the past 20 years, it happened a few times. And we ended up tough times, probably in a relatively better position than we — than before the recession”.

    On the other side of the spectrum is Walmart. The discount retailer downgraded expectations for the second time this year as customers reprioritise expenditure. Food inflation of double digits has led to shoppers reducing spending on discretionary merchandise, particularly apparel items. Subsequently, more markdown will be required to pass inventory through. Earnings are expected to fall 13-14 per cent in 2023, down from prior guidance of 11-13 per cent.

    The golden era of advertising is over

    With margins under the pump, companies are ditching unnecessary costs. None is easier to switch off than marketing. Snap, the owner of the social media app Snapchat, warned investors of “a pretty good deceleration” in advertising over the last 90 days. After historically growing at 50 per year, revenue growth in the third quarter is flat. Subsequently, the Snap share price sunk 39 per cent.

    “…various headwinds put pressure on the earnings of a wide variety of companies, and this is directly impacting the demand for advertising”

    Derek Andersen, Snap CFO

    Google was also notably downbeat. Management talked about cycling elevated comparable periods in addition to the uncertain global economic environment.

    A white-collar recession

    What do Amazon, Facebook, Apple, Netflix, Microsoft and Shopify all have in common? They are either slowing hiring or cutting jobs. The pandemic led to a huge boost in profits for big tech. But with growth now slowing, belts are starting to be tightened.

    This is in stark contrast to blue-collar employers like General Motors which can’t get enough labour. There appears to be a skill mismatch in the jobs market which has been exacerbated by the slow reopening of borders to migrants and existing workers leaving the workforce. While the labour supply remains tight, an increase in unemployment could alleviate some of the inflationary pressures corporates are facing.

    Lachlan Buur-Jensen

    Lachlan is an experienced journalist writing across The Inside Investor and The Inside Adviser.

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