Earnings Season Prep: Top 3 Investor Concerns for Q2 2023

As IROs and management teams dive headfirst into earnings season preparation, investors too are gearing up for potentially tough conversations ahead. Several preliminary themes are quickly taking shape around investors’ top concerns for the quarter, and CEOs and management teams should expect some pointed questions on these key issues.

Be ready with polished messaging and detailed action plans

The best approach is to shape clear messaging around the focal points dominating this season’s earnings conversations. Companies that include details on strategies for addressing current market trends will do best at increasing investor confidence and assuaging concerns.

Below are the three topics most companies will need to be ready to discuss and some tips for preparing effective responses.

1. Softening end market demand: Have a playbook ready to share

Inflationary headwinds and higher interest rates have more consumers tightening their belts, resulting in softening demand and a decline in overall business activity across several industries including manufacturing, shipping, consumer discretionary, and outdoor recreation, to name just a few. The latest market data—including a June drop in U.S. Purchasing Manager Index (PMI) scores and a six-month low for new manufacturing orders received by private businesses—paint a dreary picture for the remainder of the year. Commentary from recent earnings calls corroborate the deflated expectations, and companies such as FedEx, Winnebago Industries, and Walgreens are all noting demand concerns and, in some cases, are adjusting guidance accordingly. Walgreens, for example, cut full-year earnings guidance by 11%.

However, these companies are also sharing the details of their plans for addressing the situation. Walgreens will counter what it sees as the new profile of a “more cautious and value-driven consumer” by raising its target of internal cost-cutting measures from $3.5 billion to $4.1 billion in total savings. Winnebago Industries is responding to continued “subdued consumer demand” by leveraging promotions and discounting to move inventory. The outdoor lifestyle products manufacturer says it is staying focused on preserving “internal agility” and uncovering operational efficiencies to mitigate these headwinds.

All companies need to be ready to share their playbooks for adjusting or rightsizing their businesses to current demand levels and mitigating any unnecessary expenses to help drive long-term profitability.

2. Labor market impact on the P&L: Understand labor market dynamics and be transparent on plans for addressing increased labor costs

The labor market continues to be a challenge for most companies, with far more available jobs than workers driving wages and talent costs up. The Fed has indicated that wage growth is a key metric in the fight to curb inflation as it looks to determine future rate hikes, and U.S. unemployment rates still remain below historical levels. At the same time, companies are adjusting headcount to better match lower levels of demand, also citing wage inflation as a major contributor to margin pressures.

Some companies are speaking to their rightsizing efforts as evidence of proactive cost reduction. CarMax boasted a 15% reduction in year-over-year SG&A expenses, pointing out decreased staffing to match current sales. FedEx conducted another round of furloughs this quarter and limited hiring of salaried employees due to lower volume, allowing for greater cost-control over labor expenses. The shipper’s headcount in the US is down by about 29,000 in fiscal year 2023 as part of its cost-reduction initiatives this year.

Companies which have the option to flex costs have called out their ability to do so rather than enact reductions in force. In a recent investor presentation, Lear emphasized its ability to completely offset wage inflation through continuous improvement initiatives. On a different note, Kraft Heinz expects to leverage technological advancements to mitigate rising labor costs, noting plans to increasingly incorporate automation and digital manufacturing to reduce dependence on manual labor going forward.

Regardless of industry, all companies will need to be able to address go-forward labor strategies that balance cost management with the ability to meet shifts in end market demand.

3. Balance sheet health: Discuss strategies for debt and on-hand inventory

With corporate defaults double what they were a year ago, the Street is keeping a close eye on balance sheets. High inventory and high debt are two red flags that won’t be overlooked.

Nike felt the pain of the first scenario, missing on earnings for the first time in three years. With the sports apparel behemoth’s inventories still 23% above 2021 levels, analysts lowered the company’s price targets ahead of its fiscal Q4 earnings call. The current pullback in consumer spending is making it harder for any company to unload unwanted inventory without promotion or deep discounts, which will impact margin expectations, even as the costs of holding goods and building a backlog add up, impacting the bottom line. Any company with inventory on the balance sheet will need to be ready to address tough questions on how the surplus is being managed appropriately, especially if wavering demand is a concern in the industry.

High debt levels will also garner plenty of scrutiny from the Street this season as interest rates are expected to climb through the remainder of the year, making it harder to refinance debt. On General Mills’ recent fiscal Q4 23 earnings call, analysts immediately pounced on the company’s plans to refinance $4 billion in debt next year, inquiring about opportunities to apply free cash flow to pay down short-term debt. The company emphasized the impact of its debt reduction efforts, reducing net leverage and leaving flexibility for strategic M&A to advance “portfolio reshaping ambitions.” But the Street still wanted more details about capital structure and the strategy to address the greater costs and risks associated with debt. All companies should have answers at the ready for similar debt-related questions.

Make tough calls easier with good preparation

Market forces are triggering significant concerns for investors, and they will most certainly be looking to management teams to talk through their plans for addressing the biggest issues. The better companies can sharpen their messages and articulate their strategies, the more successful their earnings seasons calls and communications will be.

Need help prioritizing and finetuning messaging? Reach out to our strategic investor communications team for more insights and advice.