Earlier this morning, we noted Starbucks’ (SBUX) inflation woes.
When I wrote "Expect to see more problems like these," I didn’t mean within an hour or two: FedEx (FDX) dropped the bomb that slowing growth and higher energy costs put the squeeze on profits and future revenue expectations:
FedEx Corp. lowered its earnings outlook, citing high fuel costs and weakness in its less-than-truckload freight business.
The Memphis, Tenn., based shipping company cut its fiscal second-quarter earnings estimate to $1.45 to $1.55 a share from $1.60 to $1.75 and dropped its its full-year earnings estimate to $6.40 to $6.70 a share from previous guidance of $6.70 to $7.10.
FedEx said the cuts were due in part to an 8% increase in fuel costs to $85 million and weaker shipping volumes. Less-than-truckload carriers combine freight from multiple customers in their trailers.
"While we have dynamic fuel surcharges in place, they cannot keep pace in the short-term with rapidly rising fuel prices," said Alan B. Graf, Jr., FedEx executive vice president and chief financial officer.
So let’s make a list: What other firms are in danger of seeing sales and profits falter due to high input prices — be they food, energy, labor or other crucial components?
Use comments below to add to the list . . .
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Source:
Fedex Cuts Earnings Outlook
DOW JONES NEWSWIRES
November 16, 2007 9:34 a.m.
http://online.wsj.com/article/SB119522218219395678.html
that’s going to be a pretty long list……
Anything related to consumer discretionary spending…… is that general enough?
seriously the writing has been on the wall for SBUX……Schultze made sure that no one was going to sell stock above the price he HAD to sell at-around 33 (remember his quality epiphany??-well that came three days after he had to sell 3m shares to finance some other venture)it’s been a steady decline since that point.
mgmt at SBUX needs to take off the blinders and realize doubling the growth of the company is just unrealistic in the current credit problem.
Gap and fade……yawn….
Ciao
MS
On an interstate just east of Dallas I noticed 4 Fed Ex trailers parked at a truckstop. They were there 2 days later. Unusual because they usually pass me doing 80!
yum
but otherwise ms is right. Any company that buys inputs in the global market and then sells to the real wage stagnant u.s. middle class is in the vice.
Retailers will receive a double-whammy due to lower sales from tapped-out consumers and higher transportation costs.
I agree with Michael S. above. Perhaps “What Other Firms…” should be changed to “What Other Sectors…”. Obviously, the Retail sector has taken some heavy shots–Nordstrom, J.C. Penney, Walmart etc. Anything that’s “first” in line in an expected or substantial pullback in consumer discretionary spending… And we don’t need to discuss what’s going on with the Brokerages or the Banks… The leading sectors of our economy…
But, I was expecting a Rally in the Markets sometime soon, carrying us into the beginning of next year, based upon a correction in the Energy Markets– specifically Oil and a fairly strong bounce in the dollar. Tuesday looked like a 90% up day (although the Volume was not quite there…). From my Layman’s perspective of Elliot Wave Analysis on the Dow a Rally would also seem to fit the Wave Count.
The Transports however look like they’re going to test their 200day.. and if the Dow does not hold somewhere around 12,850, the S&P 1410-1430, I think this overly long Bull Market will meet it’s end…
Jeez Barry, sure is early the morning to be doing math. And on a Friday, no less.
The company that immediately came to mind was McDonald’s. They are a massively vertical integrated operation. They grow a lot of their raw materials, and frozen meat is _heavy_. Up ticks in fuel prices have to be hitting them on a couple of levels.
And how are fuel prices going to effect Lowe’s and Home Depot? Shipping Lumber and cement is not something that can be taken…lightly.
Mike
What about Netflix and Amazon? It must be hard to maintain low prices in the face of increasing transport costs.
In regard to business in general and not just stocks, non-chain restaurants seem to be suffering more.
It just seems like with the increase in energy costs the airlines have to start suffering soon due to a downturn in business. It’s hard to tell with the holidays coming up, but I would look for a downturn in the bootom line after Christmas.
The Chicken Ranch in La Grange, Tx will need to go on twofers for Aggies at College Station to be able to afford the trek.
All companies except Google and Apple.
Do you think NetFlix invested in the Forever USPS 1st class stamps? Would you short or long that one?
unable to pass along higher imput cost has been here in many industries for a number of years. The printing industry is a good example were technology changes, combined with higher imput cost have meant significantly lower margins since the tech bust in 2000. Industry consolidation along with corporate junk bond market has keep the industry on life support.
I would think Food companys like California Pizza, Papa John’s, Pizza Hut etc. Most of these places delivery there pizza which higher energy cost can effect
I think further down the line gaming/casinos. Evenutally, with the consumer being hurt by inflation and less credit. They will have less to lose at casinos.
Look for UPS and DHL to follow lower.
are you seriously asking which companies will be affected by sky-high oil/food prices? um, how about western civilization? what part of our way of life doesn’t depend on cheap oil and abundant food?
are you asking which sectors will be affected first? well, i wouldn’t have guessed the food sector, cause i would have assumed that in a perfect market system such as ours and with a benevolent gov’t such as ours, we would have seen some kind of incentives/subsidies to keep food affordable before we would see incentives to burn food in the tanks of SUVs. but i guess the ethanol craze proved me wrong on that one, so.
beats me. i guess next industry to be affected could be our healthcare system. cause, i mean, who needs to eat or be healthy, as long as we can play the stock market?
The gov’t via the AG dept also is in the business of driving up basic food commodity prices using special pricing programs. Here’s a good example. The Ag dept has a milk price support system but does not cover the cost of production so they have a program that pays a dairy farmer to turn his herd, that is they pay the farmer the market price for his herd (beef) and pays him for one years milk production. Once the farmer takes this option he can begin dairy farming the next day with replacement heifers. A typical herd of 2,000 could provide the farmer with a check over 3 million dollars. Plus the reduced number of milk cows pushes up the basic commodity. Your gov’t at work.
commercial leasing, major law firms (another cyclical blow-up), regional mall owners/operators, consumer electronics, major appliances, construction materials; banks, banks, banks.
I’d bet that anyone in the business of arranging, managing, facilitating, financing, and marketing overseas travel —travel agents, cruise lines, vacation planners, ad agencies— is going to feel the bite.
The swan-diving dollar makes travel and vacations in Europe and elsewhere much more expensive, as will the dramatic increases in oil prices. A middle- and upper-middle class that is feeling pinched due to job losses, skyrocketing medical care, education costs, and non-core inflation will certainly cut back on vacations to London or Paris in favor of vacations in this country.
In terms of national economic importance this sector is of course not as big as manufacturing or services, but I bet it’s bigger than most people realize.
BTW here;s alittle article on what is going on at Northern Rock…..
What will go on here eventually…
http://www.telegraph.co.uk/opinion/main.jhtml;jsessionid=QA5JUU3DU4AGPQFIQMGCFGGAVCBQUIV0?xml=/opinion/2007/11/16/do1601.xml
The big difference is that Brown was in charge of removing regulatory oversight when he was in finance…..he’s now the prime minister and has to deal with it front and center…….that’s how it should be IMO.
They talk about losing $30 billion as if it’s the end of the world. peanuts when compared to what will be lost here.
Ciao
MS
At some point I believe more consumers are going to say ‘no thank you’ to more of the retailers. Here is a case in point: we enjoy a high protein breakfast drink and used to buy it at Costco, who stopped carrying it and replaced it with what one would think is a similar product, same price BUT you have to use twice as much. So we said ‘no thank you’ and went to the source to buy direct.
I went to reorder online last week but then called because I thought the price was a mistake. They said ‘no, the price was increased (up 100%) because the price of milk had gone up’. What? 100%. Well, ‘no thank you’… we will find another alternative.
Nice little divergence on the DOW/S&P..
wonder what that is saying……
Ciao
MS
One ship by road, one ship by sea.
I’m sure you’ve thought of the as domestic consumer spending declines it will hurt road shipping, but the orders are coming in from overseas, which translates into high demand for shipping goods across seas, hence the bid in the index (that if it was a tradeable index). Check out the Baltic Dry Index
(http://investmenttools.com/futures/bdi_baltic_dry_index.htm).
We’re part of what used to be the most affluent, most reliable sector of the consumer economy.
Our plans are to buy nothing, and consume far less energy.
I’m really proud that my wife has been spending time every night entering our customer numbers into a service that would stop people from sending us catalogues. Last year we were shopping from those catalogues. Now we bitterly resent the resources wasted to send us this crap.
As GM of a small construction tools importer I am about to raise my prices more than 6% beginning of next year. This is not directly related to oil or food but to the dollar going down forcing my european supplier to raise it’s prices by 7%…just another good reason for inflation building up
Reminds me of an old market saw: When they raid the joint, they even take the piano player.
Updated new age version: We’re all connected.
Bottom line: Eventually, everyone gets dinged.
Every utility on the planet will see a rise in costs and consequently, prices.
Inflation is the enemy of all investors and citizens.
I’m not sure even Google and Apple will remain unaffected.
Apple: Very hip name, makes the cool gadgets everyone wants, computer sales surging. Very nice story. But we know in downturns that this is all discretionary stuff. Much of the iPod market consists of replacing your old one with the spiffy new one. In a recession, hey, your old one still works OK so maybe you hold on just a little bit longer. Sales slow.
Google: In the strongest position, for sure. But in a recession, and consumer-driven demand slows, and retail starts hurting, will Google be able to demand higher ad sales? Will some of the smaller advertisers using AdSense cut their ad budgets? I would think so.
I’ve noticed rising costs in emerging market labor and especially utilities. Likely to impact any companies with significant labor costs in emerging markets. So retailers with significant emerging market exposure, telcos, brewers, etc. Could be that their high revenue growth offsets this impact, but something to keep an eye on.
Barry:
I LOVE the inflation ex inflation posts. Keep it up.
Daylight must be used to disinfect the lies.
I can’t think of many things to put on the runaway inflation list that I can’t offset by making other choices or increased functionality.
Long Hedonic Adjustments
Strasser,
According to the government, your experience proves that there is no inflation. Substitution is one of the factors used to adjust CPI. If you can substitute another product instead of accepting the price hike, the government says costs have not risen. Shameless.
Nevertheless, can any of you inflation hawks explain why 10-year (and longer) bond yields remain so low if inflation is for real? Yields seem to argue for a deflationary recession, not anything inflationary.
ALL companies are going to be hurt by the rising cost of materials and energy. The only substantive mitigating factor will be just how much international exposure they have as the dollar continues to fall and their products sold overseas make up for the domestic profit shortfall. I think it would be much more effective to point out companies that WON’T be hurt as much by commodity price increases rather than those that will, because the latter list will include nearly every business in America to some extent. The moral? If you’re going to buy American stocks, buy those which produce commodities (especially precious metals) or international exposure, preferably both. BUD, MCD, WMT, XOM, COP, CHK, CDE, AUY, PAAS, HL et al are all good choices.
And F, if you want a turnaround play.
Barry,
The dollar devaluation engineering and mortgage crisis, all boil it down to about 35% of our country’s GDP. In essence, this dollar deflation will be the least of our worries, and rate cuts will not help.
“I must be cruel only to be kind.
This bad begins and worse remains behind.” Shakespeare
David:
“Cruel to be kind, in the right measure
Cruel to be kind, it’s a very good sign
Cruel to be kind, means that I love you
Baby, you gotta be cruel to be kind.” Nick Lowe
Maybe rail would go up instead of down? More efficient transport may pick up business from less efficient means (truck an air freight).
Anyon have an opinion about whether I should change my broker to “not Etrade”? Are they all equally threatened?
Tom:
You should at the very least be covered by SIPC.
“Tom:
You should at the very least be covered by SIPC.”
Thanks– would I end up with my stocks then, or would SIPC give me cash equivalent? I’d hate that.
http://www.sipc.org/how/brochure.cfm#top
Barry- a few days ago you’d asked your readers to think about other industries that were going to be affected by higher energy costs, and how that may play out in their individual business models.
I thought the exercise was a little absurd (wouldn’t it be a shorter list of firms that won’t be impacted?), but it did lead me to thinking about unanticipated consequences of the housing market crash (yes, crash.)
For instance, the State of California now faces a multi-billion dollar budget shortfall as property tax incomes fall off a cliff. That translates into less money for everybody….except cops and prisons.
But something that really swung me around was this one: A significant increase in domestic violence.
http://www.kcra.com/news/14611538/detail.html
http://www.news10.net/display_story.aspx?storyid=35158
What other not-so-obvious areas of our lives are we going to see impact from our current economic issues?
PS – my wife works for the Treasurer’s Office. During our homeward commute on Friday, she tells me about how many municipalities in CA are facing serious credit problems as their property tax revenues decrease, and they’re unable to meet financial obligations. This will result in a downgrade of their bonds, which makes money more expensive…..which means budget cuts…….which means less government services……
Barry; I did not know you had ‘questionable’ ancsetry. I know this site is not ‘comedy central’, but I frequently get a few laughs when I read your comments! Henny Youngman has been sighted near this site!