Corporations want investors and analysts to know that they, too, realize the good times fueled by low interest rates and soaring stock prices have ended.Earnings calls so far this year show that many of America’s largest and most prominent corporations are trying to demonstrate that they’re serious about reducing costs, dealing with profit growth and returning money to shareholders. Some companies, especially in the technology sector, are turning to layoffs — often in the tens and thousands of workers — to rein in costs and hope to see a looser labor market and lower wage growth as a result.“The actual top-line results (sales) showed a slowing of the ability of companies to pass along higher costs (with some extra profit included),” S&P Dow Jones Indices Senior Index Analyst Howard Silverblatt wrote in an analysis. In other words, profits have been eroded by businesses no longer being able to raise prices with impunity.Looking at how chief executives talked about their earnings in January, Silverblatt noted that “along with the relatively decent numbers were numerous warnings from CEOs of harder times, squeezed margins … and consumer pullbacks.”Morgan Stanley analyst Michael Wilson calls this “margin trouble,” which means businesses still pay out the high wages they needed to attract workers in 2021 and 2022 while their own ability to set prices fades away. “We have already seen margin trouble for a number of companies that have reported 4Q earnings and we only expect the issue to heat up as we move further into the year,” Wilson wrote in a note for clients.But corporations are still trying to satisfy nervous investors, whether it’s through layoffs or paying out more money to them. As the economy gets choppy, companies will have to work harder, and workers might end up paying the price.Reducing costs — and workersTechnology executives especially were practically tripping over themselves to tell investors that they’re going to get more disciplined about costs.“We took significant actions in 2022 to operate more efficiently. In Q4, we made the difficult decision to lay off employees while de-prioritizing certain projects and curtailing non-head-count-related expenses,” Meta Chief Financial Officer Susan Li said on its most recent earnings call. Meta, like many technology companies, announced large-scale layoffs before its earnings were released, but analysts and investors think there could be more to be done.Mark Zuckerberg even said his “management theme for 2023″ was the “year of efficiency.” A far cry from “move fast and break things.”Between the Meta executives and the analysts on its earning calls, “efficiency” was mentioned 33 times; “metaverse,” by contrast, was mentioned just seven times.One analyst asked Microsoft Chief Financial Officer Amy Hood about the “expense actions” — analyst-speak for layoffs — “that you announced last week” but wanted to know, “How are you thinking about head count for the remainder of the year and the possibility of further expense actions?”“I do think that we feel confident in that exit rate,” Hood responded. “As I said, it will certainly imply that year-over-year growth … will be quite small.”Bob Iger announced in his first earnings call since returning as chief executive at Disney that the company would be shedding 7,000 workers and trying to save $5.5 billion in expenses across the company.A potential slowdown in price hikesAccording to the Federal Reserve, mild inflation may be something of a headfake. The Fed is focused on a subset of prices — those charged by services businesses that aren’t housing, where workers’ wages make up a large portion of the cost of operations, like a restaurant. If wages are growing too quickly, then prices will continue to rise as well, the Fed’s thinking goes. But looking at the earnings of two of the largest and most prominent food service businesses in the country, Chipotle and Starbucks, shows that inflation and wage growth, which were sharp over the last year, could slow down this year.Chipotle’s menu pricing rose 13.5 percent in the past year, said Jack Hartung, Chipotle’s chief financial officer, on a call with analysts. But this did not necessarily translate into gargantuan profits, the executives explained on the call: “The benefit of sales leverage was somewhat offset by wage inflation in addition to higher-than-expected sick pay and medical claims.” In other words, Chipotle was paying its workers more, and its workers were more likely to be sick, which meant increased costs even as they were able to raise prices, so their profits ended up below what analysts expected.For Starbucks, a race between higher prices and higher expenses (including labor costs) led to record revenue in its fourth quarter of $8.7 billion, but with profits trailing the revenue growth. Its executives attributed this to both worse-than-anticipated revenue in China due to the country’s covid lockdowns, as well as higher costs throughout the business, including worker pay.Pricing for the next year, however, may stay in place or rise less aggressively. “We’ll start to see our pricing levels normalize more to historical level ranges than what we had seen previously,” said the coffee chain’s Chief Financial Officer Rachel Ruggeri. “And typically, our pricing had been taken in line with inflationary pressures. So given that we’re seeing inflation, we’re still seeing inflation elevated relative to prior years below FY ’22, but we’re starting to see it soften slightly.”Outside the labor-intensive food service industry, companies may be feeling downward pricing pressure, instead of up. Ford Chief Financial Officer John Lawler told analysts that “market forces, I think, are going to drive average transaction prices down, we think probably around 5 percent. And that will come some from the dealer margins, but also from higher incentives.” In other words, dealers will have to eat some of the lowered price of cars.And even if inflation cools down, wages may not, explained Morgan Stanley’s Wilson: “A tight jobs market does not relieve margin pressure for corporates at this point in the cycle as labor costs remain stickier than end demand and pricing.”Keeping shareholders happy with stock buybacksWhen stock prices fall, shareholders get antsy, and sometimes even directly ask for layoffs. But lower costs aren’t the only things shareholders like; they also like it when companies buy back their own stock or pay out dividends and thus “return” capital to shareholders. Buybacks buoy the price of a stock and let investors who want to sell redeploy their capital somewhere else, while dividends are just a straight-up cash payment to investors. Recent earnings announcements have been accompanied by a flurry of buybacks and dividend payouts.Meta announced that it would buy back $40 billion worth of its stock, and Starbucks brought back its share repurchase program, buying almost 2 million shares in its first quarter. Its dividend payments and stock buybacks plan could add up to $20 billion by the end of its 2025 fiscal year.Starbucks had suspended its buyback program early last year in order to “invest more profit into our people and our stores,” as its founder and Interim Chief Executive Howard Schultz put it in a letter. Chevron, which like many energy companies had a blowout year, announced a $75 billion buyback program and an increase in its dividend.Disney also said that it would seek to reinstate its dividend after suspending it in 2020 in order to deal with the disruption to its business from covid-19. Nelson Peltz, the hedge fund manager who had been agitating for a board seat, said Thursday that he would end his campaign. He had called for, among other things, the company to start paying out dividends again.These buybacks have turned into a political target for Democratic lawmakers, who see them as rewarding shareholders instead of investing in equipment and staffing. While the Inflation Reduction Act included a small excise tax on buybacks, in his State of the Union address, President Joe Biden proposed quadrupling the tax, saying that “corporations ought to do the right thing” and that the tax would “encourage long-term investments.”Political target or not, buybacks are back as a popular way to keep shareholders happy. Even the New York Times, which has activist investor ValueAct in the mix, announced a new buyback program in addition to the one it had approved last year.Stock prices may be down for lots of companies, but it’s clear that shareholders are still top of mind for executives in earnings calls this quarter. Even when investors lose, they win.Thanks to Lillian Barkley for copy editing this article.
