Under the Hood: Earnings from Consumer Facing Companies (2024)

As macroeconomic data points to a resilient yet slowing economy, corporate earnings updates are reinforcing this narrative, especially in consumer-oriented businesses. The first quarter revealed a more selective consumer, with shoppers trading down; as Walmart noted, wealthier customers were increasingly seeking value, evidenced by fancier cars in their parking lots. Initially, it was believed that this weakness would extend into the second quarter but recover in the latter half of the year as conditions eased, particularly with anticipated Fed rate cuts. However, new data from company reports in the second quarter suggests that the consumer has weakened further, casting a slightly cloudier outlook. It would be a mistake to conclude that consumers are in a downward spiral; rather, this deceleration from rapid growth appears to be setting the stage for a return to normalcy in the coming quarters.

McDonald’s – Mickey D’s, often seen as the ultimate indicator of low-end consumer behavior (and a secret indulgence of the affluent), offers insights into broader economic trends. A 1% decline in same-store sales in the second quarter might seem concerning, but it obscures a broader context. Following the global emergence from lockdown, McDonald’s saw a remarkable 17% growth in same-store sales in 2021 and 11% in 2022, far exceeding typical low-to-mid-single-digit growth rates. Sales are projected to remain flat this year, with a return to modest growth expected in 2025. It’s tempting to view the recent decline as indicative of a downward trend, especially given dwindling savings and rising credit card debt of consumers, but growth rarely follows a linear path. The Golden Arches may be to blame for some of the downward pressure as well. The increasing price of a “Value Meal,” often surpassing $10, has eroded the company’s perceived value proposition, potentially contributing to the decline. Meanwhile, Chipotle, renowned for its fresh ingredients, saw an acceleration in same-store sales during the same period.

Walt Disney – The House of Mouse recently disappointed investors with news of slowing demand for its theme parks. Although park attendance remained flat, increased costs slightly squeezed profitability. Rival Comcast reported similar weakness in its park profits, highlighting a broader trend. Disney’s management noted that “the lower income consumer is feeling a little bit of stress,” which is expected to contribute to softer theme park attendance for the next few quarters. After several years of “revenge traveling” and enduring 4+ hour lines, it appears park growth is normalizing. While the exact quarterly sales progression is difficult to predict, mid-single-digit growth rates are anticipated over a medium-term horizon. This slowdown in park performance unfortunately overshadowed Disney’s solid results in its streaming business and another beat-and-raise quarter. Management now expects annual earnings to grow by 30%, up from the previously forecasted 25%. The multi-year outlook for parks appears bright and the company is accelerating investment to add more attractions, despite the temporary attendance softness.

Airbnb – Shares of Airbnb recently hit 52-week lows following another quarter of decelerating bookings and a forecast of “sequential moderation” for the third quarter. This marks the third consecutive quarter of downbeat guidance and comes on the heels of Booking Holdings’ report of “mild moderation” in its markets. While it appears that travel demand is cooling off, it’s crucial to recognize the remarkable achievements Airbnb has made and the vast opportunities still ahead. Since its IPO in 2020, Airbnb’s free cash flow has soared from -$660 million to $4.5 billion. In fact, the company is on track to generate nearly 70% more cash this year than Marriott, an impressive accomplishment for such a relatively young business.

Uber – the ride-hailing and food delivery powerhouse, defied intensifying consumer-related headwinds by beating expectations and providing a better-than-expected outlook. In contrast, rival Lyft’s underwhelming earnings report, which projected flat sequential growth, reinforced the narrative that Uber is gaining market share. With its diversified revenue streams from both food delivery and rides, coupled with its massive scale, Uber is well-positioned to dominate the market. To put it in perspective, Uber’s Q3 EBITDA guidance is just over $1.5 billion, compared to Lyft’s forecast of only $95 million. Despite a more cautious consumer, Uber continues to unlock new growth avenues, such as its recent agreement to deliver Costco orders. Additionally, concerns about Tesla’s impending robotaxi network, perceived by some as an existential threat, were mitigated by Uber’s report of a 6x increase in autonomous rides on its platform. With Uber’s scale, autonomous vehicles could ultimately lower ride costs and significantly boost platform volumes, solidifying its market leadership.

Reflecting on this quarter’s earnings, while the results haven’t been bad, they haven’t provided much comfort either. The S&P 500 is on track for an impressive 11.5% EPS growth this quarter, the highest in over two years. However, it’s the outlook that’s weighing on sentiment, and it’s being exacerbated by softening macro data and the unusual yen carry trade unwind. Looking ahead to the third quarter, earnings growth is expected to decelerate sharply to just 6%, before bouncing back to 16% in the fourth quarter. This anticipated rebound positions the market well for the start of 2025, potentially bolstered by multiple rate cuts. However, with current sentiment souring, analysts may begin to question the likelihood of this rebound. My two cents are, whenever fears of recession arise—marked by a weaker consumer, softer job market, and geopolitical tensions—the instinct is to adopt a defensive stance, only to find that the fundamental results six months later are better than expected and the market continues its upward march.

For more content by Jake Bleicher, Portfolio Manager click here.

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