- United States
- Specialty Stores
Margin Watch: Here are some of the Consumer Companies Maintaining their Margins Despite Rising Costs
Reviewed by Michael Paige
In 2022 companies faced serious levels of inflation for the first time in decades. The result for many companies was lower gross margins and lower operating margins. But this has also been an opportunity to see which companies have been able to maintain their profit margins and which haven’t.
We had a look at companies in the US consumer discretionary sector to see which ones stood out in each industry. We compared margins from Q3 21 with Q3 22, and looked specifically at gross margins (revenue - the cost of goods sold) and operating margins which reflect the effect of other operating expenses on the bottom line.
If a company can maintain or improve its margins in an inflationary environment it may have pricing power - i.e. the ability to raise prices without losing sales to competitors. This is a distinct competitive advantage. If a company can’t raise its prices as costs rise, those costs translate into lower returns for shareholders.
The companies in each industry with better margins also have more cash flow to invest back into the business - which may improve their competitive position even more.
Apparel and specialty retailers
Most retailers saw their margins decimated by rising costs in the last year. Interestingly, most companies with declining gross margins saw an even bigger drop in their operating margins - implying negative operating leverage.
There were however a few notable exceptions - companies that managed to maintain or improve their gross and operating margins.
MercadoLibre (Nasdaq: MELI) and Five Below (Nasdaq: FIVE) improved both gross and operating margins. Home Depot’s (NYSE: HD) margins were both flat, which could probably be regarded as a win relative to the rest of the industry.
Amongst the losers were YETI Holdings (NYSE: YETI), DICK'S Sporting Goods (NYSE: DKS), Urban Outfitters (Nasdaq: URBN), American Eagle Outfitters (NYSE: AEO). These companies all saw gross margins falling more than 10% while operating margins fell 16 to 52%.
Listed restaurants fared slightly better than retailers - but once again there was a wide range of outcomes. Chipotle (NYSE: CMG) managed to increase its gross margin by 3%, and its operating margin by 23%! Yum Brands (NYSE: YUM), McDonald’s (NYSE: MCD), and Texas Roadhouse (Nasdaq: TXRH) kept their margins more or less flat.
Margins for Domino's Pizza (NYSE: DPZ) and Wendy's (Nasdaq: WEN) fell more or less in line with inflation. Cracker Barrel (Nasdaq: CBRL ) and Papa John's (Nasdaq: PZZA ) struggled to keep rising costs under control and saw a sharp decline in operating margins.
Travel & Leisure
The casino and hotel groups Wynn Resorts (Nasdaq: WYNN) and Las Vegas Sands (NYSE: LVS) managed to increase gross margins as business normalized, but massive increases in costs resulted in lower operating and net margins. Caesars Entertainment (Nasdaq: CZR) fared slightly better.
Elsewhere in the travel industry, Avis Budget Group (Nasdaq: CAR) and Marriott Vacations Worldwide (NYSE: VAC) managed to hold onto their margins.
Airbnb (Nasdaq: ABNB) and Expedia Group (Nasdaq: EXPE) managed to maintain their gross margins and improve operating margins.
The companies hit hardest were Lyft (Nasdaq: LYFT) and Uber Technologies (NYSE: UBER) as they battled rising fuel costs and stiff competition.
Most media entertainment companies experienced a notable increase in expenses which cut into their operating margins. Walt Disney (NYSE: DIS) was one exception - though that may have been the result of its parks returning to normal business.
Nexstar Media Group (Nasdaq: NXST) and News Corp (Nasdaq: NWSA) also managed to maintain their gross margin and benefit from operating leverage.
The losers in the media were Netflix (NasdaqGS: NFLX) and Roku (Nasdaq: ROKU), both of which had their margins squeezed as competition intensified.
Other consumer industries
In the auto industry, Harley-Davidson (NYSE: HOG) stood out as a company that managed substantial margin improvement. Ford (NYSE: F) was a notable loser in the industry with profitability taking a knock at each level of the income statement.
Amongst the footwear brands, Nike (NYSE: NKE) was able to maintain its gross margin - which shows the power of its brand. Skechers U.S.A (NYSE: SKX ) and Crocs (Nasdaq: CROX) both took a knock from rising expenses.
Homebuilding was the only industry where nearly every company improved its margins. This may be a result of the price of building materials rising early in the year, and then declining. Taylor Morrison Home (NYSE: TMHC ) and KB Home (NYSE: KBH) both improved operating margins by more than 50%.
What this means for investors
The impact of rising costs on profit margins within each industry may show us which companies are better positioned, and which aren’t. In this post we only considered changes to profit margins - obviously, growth and value are also crucial.
The actual margin levels are also important. If a company’s net margin improves, but it's still only 2% it’s still not very profitable.
For many businesses in the sector, debt is also something to consider.
To view the full analysis for any of the stocks listed above, as well as any risk factors you’ll want to be aware of, click on the hyperlink.
What are the risks and opportunities for Home Depot?
The Home Depot, Inc. operates as a home improvement retailer.
Earnings are forecast to grow 3.45% per year
Earnings grew by 7.3% over the past year
Significant insider selling over the past 3 months
Has a high level of debt
Further research on
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Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Richard is an analyst, writer and investor based in Cape Town, South Africa. He has written for several online investment publications and continues to do so. Richard is fascinated by economics, financial markets and behavioral finance. He is also passionate about tools and content that make investing accessible to everyone.
The Home Depot, Inc. operates as a home improvement retailer.
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