Corporations employ layoffs and buybacks in the name of efficiency

Corporations employ layoffs and buybacks in the name of efficiency

Companies want investors and analysts to know that they too realize that the good times fueled by low interest rates and soaring stock prices are over.

Earnings calls so far this year show that many of the largest and most important companies in the United States are trying to demonstrate that they are serious about cutting costs, growing profits and return money to shareholders. Some companies, particularly in the tech sector, are turning to layoffs — often tens and thousands of workers — to control costs and hope to see a looser labor market and lower wage growth as a result.

“Actual results (sales) showed a slowdown in companies’ ability to pass on higher costs (with some additional profits included)”, Howard Silverblatt, S&P Dow Jones Indices Principal Analyst written in an analysis. In other words, profits have been eroded by corporations that can no longer raise prices with impunity.

Reviewing how CEOs talked about their earnings in January, Silverblatt noted that “alongside the relatively decent numbers, there were plenty of warnings from CEOs about tougher times, squeezed margins…and consumer pushbacks.”

Morgan Stanley analyst Michael Wilson calls this the “margin problem,” meaning companies are still paying the high wages they needed to attract workers in 2021 and 2022, while their own ability to set price fades. “We have already seen margin issues for a number of companies reporting Q4 earnings and expect the issue to worsen as we move through the year,” Wilson wrote. in a note to customers.

But companies are still trying to satisfy nervous investors, whether through layoffs or paying them more money. As the economy becomes turbulent, businesses will have to work harder and workers could end up paying the price.

Reduce costs — and workers

Tech executives, in particular, were practically tripping over themselves to tell investors that they will become more cost disciplined.

“We have taken significant steps in 2022 to operate more efficiently. In the fourth quarter, we made the difficult decision to lay off employees while deprioritizing certain projects and reducing non-staff related expenses,” said Meta CFO Susan Li on its latest earnings call. . Meta, like many tech companies, announced large-scale layoffs ahead of its earnings release, but analysts and investors believe there may be more to do.

Mark Zuckerberg even declared his “management theme for 2023” to be “the year of efficiency”. Far from “moving fast and breaking things”.

Between Meta executives and analysts on its earnings calls, “efficiency” was mentioned 33 times; “metaverse”, on the other hand, was only mentioned seven times.

An analyst asked Microsoft CFO Amy Hood about the “spending measures” – analysts say layoffs – “you announced last week”, but wanted to know: “How do you see the number of employees for the rest of the year and the possibility of additional expenditure actions?

“I think we’re confident in that exit rate,” Hood replied. “As I said, that will certainly imply that the year-over-year growth…will be quite weak.”

Bob Iger announced on his first earnings call since returning as Disney chief executive that the company would be laying off 7,000 employees and trying to save $5.5 billion in spending across the board. business.

A potential slowdown in price increases

Federal Reserve says mild inflation could be a pretense. The Fed is focusing on a subset of prices — those charged by non-housing service businesses, where worker wages make up a large portion of the cost of operations, such as a restaurant. If wages rise too quickly, prices will also continue to rise, according to the Fed. But an examination of the earnings of two of the nation’s largest and most important restaurant companies, Chipotle and Starbucks, shows that inflation and wage growth, which were strong last year, could slow this year.

Chipotle’s menu price has risen 13.5% over the past year, Jack Hartung, Chipotle’s chief financial officer, said in a call with analysts. But that didn’t necessarily translate to gargantuan profits, the executives explained on the call: “The sales leverage benefit 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 get sick, which meant increased costs even though they were able to raise prices, so their profits ended up in below what analysts expected.

For Starbucks, a race between higher prices and higher expenses (including labor costs) led to record fourth-quarter revenue of $8.7 billion, but with profits at the bottom. lags behind revenue growth. Its executives attributed this to both worse-than-expected revenue in China due to the country’s covid shutdowns, as well as higher costs across the business, including worker compensation.

Prices for next year, however, may stay put or rise less aggressively. “We’re going to start to see our price levels normalize more to historical levels than what we’ve seen before,” said Rachel Ruggeri, the coffee chain’s chief financial officer. “And generally, our prices had been adjusted to inflationary pressures. So given that we’re seeing inflation, we’re still seeing high inflation from previous years below FY22, but we’re starting to see it ease slightly.

Outside of the labor-intensive restaurant industry, businesses may feel downward pressure on prices rather than upwards. Ford chief financial officer John Lawler told analysts that “market forces, I think, will drive down average transaction prices, we think probably around 5%. And that will come partly from dealer margins, but also from higher incentives. In other words, dealers will have to eat some of the discounted price of cars.

And even if inflation coolswages may not be, Morgan Stanley’s Wilson explained: “A tight labor market does not relieve pressure on corporate margins at this point in the cycle, as labor costs remain more rigid than final demand and prices.”

Satisfy shareholders with share buybacks

When stock prices fall, shareholders get angry and sometimes even directly demand layoffs. But lower costs aren’t the only thing shareholders appreciate; they also like companies to buy back their own shares or pay dividends and thereby “return” capital to shareholders. Buybacks support the price of a stock and allow investors who wish to sell to redeploy their capital elsewhere, while dividends are simply a cash payment to investors. Recent earnings announcements have been accompanied by a wave of buybacks and dividend payouts.

Meta announced it would buy back $40 billion of its stock, and Starbucks brought back its stock buyback program, buying nearly 2 million shares in the first quarter. Its dividend payout and stock buyback plan could be worth up to $20 billion by the end of its 2025 fiscal year.

Starbucks suspended its buyback program early last year in order “to invest more profits in our employees and our stores,” as its founder and interim chief executive, Howard Schultz, said in a letter. Chevron, which, like many energy companies, had an explosive yearannounced a $75 billion buyback program and an increase in its dividend.

Disney also said it would seek to reinstate its dividend after suspending it in 2020 to deal with the disruption to its business due to covid-19. Nelson Peltz, the hedge fund manager who had campaigned for a seat on the board, said Thursday that he would end his campaign. He had asked, among other things, that the company start paying dividends again.

These takeovers have become a political target for Democratic lawmakers, who view them as gainful shareholders instead of investing in equipment and personnel. While the Inflation Reduction Act provided for a small excise tax on redemptions, in its State of the Union AddressPresident Joe Biden has proposed quadrupling the tax, saying “businesses should do the right thing” and the tax would “encourage long-term investment.”

Political target or not, buyouts are back as a popular way to satisfy shareholders. Even the New York Times, which has ValueAct activist investor into the mix, announced a new buyout program in addition to the one it approved last year.

Stock prices may be down for many companies, but it’s clear shareholders are still top of mind for executives in earnings calls this quarter. Even when investors lose, they win.

Thanks to Lillian Barkley for writing this article.