It’s time to sort the strong management teams from the weaker ones. As the country reopened after pandemic closures, price hikes were essentially a sure bet. There was plenty of pent-up demand and products were sometimes scarce due to supply chain issues. Companies also hiked prices as a necessity to preserve margins in the wake of soaring cost pressures. Although gas prices have come off their summer peak, overall inflation will continue to be a major issue for at least the next couple of quarters. But the decisions will get tougher from here. Demand looks more tepid than it was three to six months ago, and this will give managements a difficult choice: Do they keep pushing forward with elevated prices — or even additional price hikes — to preserve margins but potentially sacrifice sales volumes? Will those price hikes be as big in magnitude as previous ones? Or do companies attempt to stimulate sales by cutting prices — but at the risk of eroding margins? Can the additional sales make up for less money made for each product or service sold? Investors have already been given a taste of this new environment in earnings reports over the past month. On Thursday afternoon, it will be worth keeping a close eye on Micron and Nike to see what they have to say about pricing, margins and demand dynamics. There are no clear answers to these pricing questions. Instead, it’s an intriguing strategic decision. Expect it to be a significant theme emerging in the weeks ahead. Look not just at what companies have done in the latest quarter, but what they are signaling in their outlooks. There have already been plenty of differing strategies already. Unlike the markdowns most other retailers are relying on of late, Zumiez and RH recently said they’re sticking with their price points — even at the cost of hurting near-term sales. The potential impact was evident in the weak full-year forecasts the companies offered up earlier this month. RH CEO Gary Friedman summed it up best, “while there may be short-term risk of market share loss as a result of our choice not to promote, we believe there is certain long-term risk of brand erosion and model destruction once you begin down that path.” Costco is another company that’s holding the line on pricing. Even though Walmart -owned competitor Sam’s Club recently raised membership fees, Costco is keeping its dues at current levels for now. It’s relying on the rewards from solid membership growth as well as strong demand for goods at its warehouses. Perhaps keeping prices competitive has been a focus too, as operating margin fell from the year-ago quarter in last week’s report . VF Corp . became the latest casualty of a more promotional environment. Before Wednesday’s market open, the parent of Vans and North Face warned that disappointing back-to-school sales and swelling inventories will lead to weaker-than-expected results for both its fiscal second quarter and its full year. It will be slashing prices to empty its clothing racks. Adjusted earnings per share for the second quarter is expected to be between 70 cents and 75 cents – well below Wall Street’s consensus of $1.00. Despite huge year-over-year surges in pricing, recent home prices are trending lower as a result of rising mortgage rates. Lennar pointed out last week that it is having to resort to price cuts – prices were down 9% from the prior quarter. The homebuilder is also having to up incentives to stimulate new orders. The good news: Executive Chairman Stuart Miller points out, “As we bring prices down and incentives up, demand is still there.” General Mills’ results beat estimates last week. A significant reason – price increases kept pace with cost increases. In fact, adjusted gross margin actually rose 1.5 percentage points from the year-ago quarter. And even in the wake of price increases, food volumes were also strong. That’s because people wound up eating at home more as gas prices and other costs surged over the summer. They curtailed restaurant dining in favor of cooking meals at home as a way to cut costs. Given the current situation, don’t rule out future price hikes too from the food maker. Although General Mills found success, Darden Restaurants struggled in the latest quarter . Same-store sales fell short of expectations and were particularly weak at its Olive Garden restaurants, which typically appeal to a lower-income consumer. It is those customers who have been more discerning in their spending in recent months. Contrast that to the fine dining segment, which saw stronger-than-expected comps, as higher income Americans remained willing to spend money. Compounding the poor sales, the restaurant operator has been reluctant to raise prices substantially – counting on a value proposition strategy instead. With food costs rising at a higher rate than menu prices, that has put pressure on the company’s margins and ultimately, its bottom line. And following its earnings warning in early September, FedEx said it’s raising rates by 6.9% starting in January. That’s notably more than the historical norm for the company. Prior to this year, the annual increase hadn’t exceeded 4.9% in several years. Then at the start of this year, rates rose 5.9%. The even bolder rate hike for 2023 comes as the shipper battles slowing demand and elevated operating costs. That prompted the earnings warning and has caused FedEx to begin cutting $2.2 billion to $2.7 billion in costs by reducing various operations. Investors have rewarded General Mills for its ability to navigate this landscape. Its stock is up 16% year to date, but Darden and FedEx have not fared as well. Darden shares are down about 16% over the same period, while FedEx has tumbled more than 42%.
© heardonwallstreet.com