This Week in Earnings – Q2’24

Executive mentions of consumer softness and a cautious discretionary spending environment remain prevalent this earnings season, a continuation of the trend exhibited last quarter.

Pricing pressures and competitive dynamics are intensifying, with demand patterns throughout Q2 remaining mixed across the sector. While travel, especially cruise lines, continues to show strong momentum as consumers prioritize travel and experiences over discretionary goods, some companies are noting a “broadening” of pressures extending to higher-income groups. They point to consumers becoming more vigilant about their spending choices amid inflation and higher interest rates. To that end, Europe and China were notable sore spots for many this quarter, and more Consumer Discretionary companies have lowered guidance than the all-company benchmarks.

Indeed, the sector’s performance relative to expectations has been lackluster. Despite reporting solid aggregate YoY growth figures for both revenue and earnings on an absolute basis (+4.8% and +13.6%, respectively), on a relative basis the S&P 500 Consumer Discretionary sector has the highest proportion of earnings results falling below consensus estimates (27%). It is also one of the few sectors, alongside Consumer Staples, Materials, and Utilities, where the majority of companies are reporting revenue figures below expectations.

While top-line dynamics are challenged, many companies are highlighting the positive impacts from productivity enhancements, moderating inflation, and reduced inventory expenses as favorable factors that resulted in EPS guidance raises. Additionally, although many executives anticipate weaker performance to persist through the second half of the year, there is also some optimism that potential Federal Reserve rate cuts beginning in September could provide relief for consumers (even before today’s market sell-off).

Key Themes

• Macro Outlook: Macro Headwinds Persist as Execs Note a Discerning Consumer; 2H Expected to Mirror 1H with Slight Optimism for Interest Rate Relief in September
• Demand: Interest Rates, Inflation, and Overall Consumer Caution Continue to Pressure Discretionary Spending
• Consumer Health: Softness Largely Reported with Some Broadening to Higher Income Groups; Still, Travel and Hospitality Industries Continue to Maintain Momentum, while Restaurant Performances Vary
• Inventory: More Tailwinds than Headwinds; Companies Highlight “Healthy” Levels, Reflecting Conservative Approach to Keep Inventory Fresh
• Margins and Pricing: Past Initiatives, Productivity Enhancements, and Moderating Inflation Helping Margins; Wages and Recently Higher Freight Rates Flagged as Near-term Headwinds Regional Trends
• Regional Trends: China Market Remains Challenging, with Execs Calling Out a Weak Consumer and “Intensified” Competition; Europe Characterized by a More Cautious Consumer, with “Broadening” of Discretionary Demand Softness