One of the worst sectors in 2022 has been consumer discretionary. High inflation has made input costs go up, and rising interest rates and falling real wages have made the economy less interested in the industry. This year, almost all consumer discretionary companies have seen their gross profit margins shrink, and some have seen their sales go down. Today, the economy may be at a point of change where inflation may finally start to slow down as demand falls faster. This is exactly what the Federal Reserve wants to happen with its “tightening policy.” For consumer discretionary firms, I think that change will slow down losses in profit margins but could speed up sales declines as people cut back on spending on things they don’t have to.
Starbucks Corporation is a good example of how this can happen ( NASDAQ:SBUX ). Before 2022, Starbucks was on a strong upswing as the company continued to grow internationally after building a strong brand in the U.S. This year’s events have changed the company’s chances, as it has to deal with rising wages and unhappy workers, which hurts its gross margins. Investors have to realize, whether they like it or not, that the lack of willing retail workers in the U.S. gives employees a lot more competitive leverage at the expense of corporate profits. Higher coffee commodity prices (though they have gone down recently) and higher energy costs (freight, etc.) also put some pressure on Starbucks, but the labor shortage is by far the most important pressure Starbucks is facing right now.
Falling real wages and a low level of consumer confidence are also bad news for the retail brand. Over the past year, the company has continued to bring in more money, but its growth rate has dropped by a lot. Starbucks has a very high “P/E” ratio of 29x because analysts think that the company will continue to grow its earnings per share (EPS) and sales quickly over the next ten years. If macroeconomic, geopolitical, competitive, or social fa...
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