Earnings Season Reveals Economic Caution

We started the week highlighting PepsiCo as one to watch, and their earnings report was slightly disappointing. They’re far from alone. This earnings season has highlighted how the tide’s turning for many companies. Growth is slowing and the outlook’s darkening…

PepsiCo is a great example. The company announced quarterly revenues of $28 billion, beating expectations. Average selling prices were up by 16%, and a 10% bump in the dividend (to $5.06 per share) was also announced. The stock gapped higher on the open, rallying back to the broken support zone at 176 before collapsing again to close near the day lows.

One of the questions we asked is if PepsiCo is still driving inflation? And the answer appears to be an unequivocal no. Well, not to the same extent at least.

Chairman and CEO Ramon Laguarta sees 2023 growth slowing from current levels:

“We expect to deliver 6 percent organic revenue growth and 8 percent core constant currency earnings per share growth.”

Chief Financial Officer Hugh Johnston also told Reuters "We have most of our price increases for the year already in place"

This reluctance to keep pushing prices at the same rate indicates some caution surrounding the economic outlook. CFO Johnston elaborated further in the analyst call:

Right now, the consumer is still quite good. But we also have to plan for multiple scenarios. And in the back half of the year, given interest rates are as high as they are, it wouldn't be shocking if there were a mild recession in the U.S. and in some of our developed markets. We've taken actions in terms of productivity to make sure in a recessionary environment, we're still well insulated to hit our numbers. But we've got to plan the business such that with interest rates as high as they are, you could certainly see some impact over time on the top line.

So that's kind of the way that we're thinking about this one. And then let's see how the year plays out. If the year plays out better, then that's great.

Nothing drastic, but the probabilities are shifting.

Meanwhile, over at Disney, theme parks are still the star of the show. Which is likely a good thing, as the streaming service is still losing bundles of cash (more than $1 billion over the reporting period), and subscriber growth has stalled. The company lost 2.4 million subscribers in the last quarter, the first time it has shed viewers since launching.

Returning CEO Bob Iger has a plan though. A large-scale restructuring, 7,000 layoffs and a renewed focus on cost-cutting. The company will be divided into three clearly defined core business segments:

• Disney Entertainment
• ESPN
• Disney Parks, Experiences, and Products

The aim is to deliver $5.5 billion in cost savings. Even large companies like Disney aren’t immune to growing too fast, and CEO Iger has returned to trim the fat and make tough decisions.

Disney shares followed a similar pattern to PepsiCo. That initial optimism quickly faded…

The worm looks to have turned for many companies, and the market isn’t as forgiving as it was in 2020 & 2021. Just take a look at Lyft. Their results and revenue forecast were well below expectations. Lyft shares are trading 32% lower in pre-market.