Welcome to the season of sales and profit warnings. Investors should brace themselves for disappointing trading updates as supply chain issues and inflation weigh on margins. There is a real risk that companies are going to miss earnings expectations despite there being strong demand for their products and services.
Nike is one of several companies to disappoint on this front. Production and shipping delays means it is struggling to keep up with demand and, as a result, has lowered its sales outlook. That caused shares in Adidas and JD Sports to fall in sympathy as investors worry that they too will be affected.
“Womenswear fashion seller In The Style is seeing strong growth in revenue but it warns that profit will be hit by higher freight costs and more people returning items,” said AJ Bell’s Russ Mould.
The former is perhaps out of its control, but the latter could have been prevented or reduced if it has stricter rules around returns. In the Style has seen a bigger share of its product sales mix in occasionwear which tend to come with higher return rates. That’s the classic trick of going to a party with the tags still on a dress and returning it the next day.
“Cost pressures are serious business. It is costing more to transport costs, there are disruptions to the flow of supplies due to driver shortages, and there is significant pressure on wages as companies struggle to recruit fill vacancies unless the pay packet is more generous than they’d normally offer.
“All these factors would suggest that 2021 is going to be remembered for the year that profit margins got squeezed.
“It hasn’t helped that many analysts have been overly optimistic with earnings forecasts. The cost pressures are so clear that widespread downgrades to profit margins seem inevitable in the coming months.
“Even supposed inflation champions like Unilever have shown that they haven’t got the pricing power required to pass on all the extra costs to the consumer.
“There is a crisis brewing. Companies may be stomaching lower profit margins due to transportation issues, but if they get to point where stockpiles are run down and they are struggling to get the necessary supplies to meet demand, then revenue will be hit as well. Lower revenue and higher costs are a nasty cocktail. This situation casts a dark cloud over earnings prospects as we look to the new year.”