This Week in Earnings – Q3’24

Execs Continue to Navigate a Challenging Macro Environment amid Ongoing Consumer Pressure and Election Uncertainty; Cautious Optimism Remains for Economic Soft Landing and Rate Relief to be Felt in 2025 

• McDonald’s ($209.9B, Restaurants): “It is clear that broad-based consumer pressures persist around the world. Consumers continue to be even more discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending, which is putting pressure on the [Quick Serve Restaurant] industry. It’s worth noting that in Q1, industry traffic was flat-to-declining in the U.S., Australia, Canada, Germany, Japan, and the UK. And across almost all major markets, industry traffic is slowing. In the context of a difficult macro environment for the industry, we know our customers are looking for reliable, everyday value now more than ever.”
• Ebay ($30.6B, Internet Retail): “Our outlook also contemplates a challenging operating environment due to persistent economic headwinds and several one-off dynamics in Q4, specifically greater consumer attention on U.S. elections and a shorter holiday shopping period this year from Hurricane Milton in early October.”
• Whirlpool ($5.7B, Furnishings, Fixtures & Appliances): “We had a solid quarter and are reiterating our full year guidance. We’re pleased to have delivered sequential margin expansion globally and, most importantly, in North America. We feel good about our pricing actions and cost plans, both of which are on track. While we continue to navigate a challenging macro environment, we see the housing market clearly positioned for an eventual rebound.”
• Hilton Worldwide Holdings ($58.3B, Lodging): “The word ‘resiliency’ that I use to describe our business is getting used a lot to describe the economy. There is a very broad consensus view that the economy has been slowing, but remains strong, resilient, and showing positive growth. The odds of a recession, at this point I think are quite low. I’m not an economist, but that’s the consensus view and I would generally agree with [it]. So, as we think about that as a backdrop, thinking about 2025, what’s going to be the macro, which can drive a bunch of our business, we feel pretty good about it.”

Interest Rates

• D.R. Horton ($58.8B, Residential Construction): “We believe that the volatility of rates, combined with general uncertainty during the election season, is causing some buyers to stay on the sidelines in the near term. To help spur demand and address affordability, we are continuing to use incentives such as mortgage rate buy-downs and we have continued to sell more of our smaller floor plans. For 2025, our homebuilding volume and profit margins will largely be dependent on the strength of the upcoming spring selling season.”
• PulteGroup ($25.9B, Residential Construction): “October has shown the highest web traffic, foot traffic, and lead volume of the year. However, the recent rise in interest rates has [led to] a more typical seasonal selling pattern, and incentives have remained elevated as a consequence. Between rate volatility, the impact of hurricanes, and the upcoming presidential election, the upcoming spring selling season will offer the best assessment of fundamental housing demand. Buyer reaction to the movement rates both down and now up again affirms that affordability remains a tough hurdle to get over for many potential home buyers.”
• General Parts Company ($16.7B, Auto Parts): “In the same way that higher interest rates have had the intended effect muting and slowing down overall growth, we are encouraged by the start of an easing scenario around the world. The UK has reduced rates once in the last, call it, six months; U.S. once; Eurozone three times; Canada three times. There’ll be a lagged benefit to that, but we would hope those types of policy decisions provide a tailwind as opposed to a headwind.”
• Mohawk Industries ($8.6B, Furnishings, Fixtures & Appliances): “In all our regions, market conditions were slower than anticipated, given high interest rates, lingering inflation and lower consumer confidence. Pricing remained under pressure as industry demand in Q3 continued to decline due to slowing in both residential and commercial activity. We expect the recent interest rate cuts in U.S., Europe and Latin America will strengthen the housing markets and increase Flooring sales as we progress through next year.”
• Brunswick Corp ($5.4B, Recreational Vehicles): “The downward movement in interest rates in the U.S. and some other markets since the beginning of the quarter is welcome and is already benefiting consumer financing costs and dealer floorplan costs. However, given the points in the current retail selling season, we do not anticipate benefits until 2025.”

Challenging Market Conditions Persist for Many on the Top Line, Leading to Lowered Guides; Those Raising EPS Outlooks Highlight Strong Execution and Operational Discipline

• General Parts Company ($16.7B, Auto Parts): “Our results for Q3 missed our expectations. Our outlook in July included anticipated improvements in market conditions in Europe and global industrial activity, neither of which materialized. Given our results to date, and our expectation that these weaker market conditions will likely persist for the balance of the year, we’ve adjusted our 2024 outlook accordingly. While many of these factors are outside of our control, we remain focused on controlling what we can, and we’re confident in eventual market tailwinds.”
• O’Reilly Automotive ($68.43B, Specialty Retail): “While we are cautious that the current macro pressures could persist as we finish out 2024 and enter next year, we are confident our industry will return to more historical growth rates in the short term. Against this backdrop, we are tightening our full year comparable store sales guidance and are now expecting a full year increase of 2% to 3% [versus 2% to 4% previously]. As a reminder, our Q4 can be quite volatile given the variability of winter weather and consumer demand dynamics during the holiday season, as well as potential impacts this year from the November election.”
• Columbia Sportswear ($4.6B, Apparel Manufacturing): “Q3 financial results reflect a continuation of the trends we’ve experienced all year. The North American outdoor marketplace remains challenged, and we are working to maximize sales in a soft consumer demand environment. Looking across the global marketplace, there are many external risks and uncertainties: outdoor industry and U.S. consumer headwinds, weather, geopolitical conflicts, supply chain disruptions, and the upcoming U.S. elections. These factors, among others, have the potential to impact consumer demand and our operations. With this uncertainty in mind, we are reducing our net sales outlook to reflect a 3% to 5% decline this year [versus 2% to 4% previously]. While we are not providing any full year 2025 guidance at this time, our objective is to deliver net sales growth and operating margin expansion. We will provide our next update on 2025 when we report in February.”
• Leggett & Platt ($1.6B, Furnishings, Fixtures & Appliances): “Our Q3 sales and earnings were below our expectations, largely due to weaker than anticipated demand in residential end markets and headwinds in automotive, hydraulic cylinders, and geo components. Sluggish demand in these businesses is expected to persist through Q4 and is expected to be more impactful than previously anticipated. As a result, we are reducing full year sales and earnings guidance. While we are encouraged to see the Fed begin a cycle of interest rate cuts, we know a series of cuts is needed to meaningfully impact housing turnover and there will also be a lag between improvement in housing trends and an improvement in mattress demand.”
• General Motors ($58.9B, Auto Manufacturers): “We have been able to grow our retail market share in the U.S. with above-average pricing, well-managed inventories, and below-average incentives. Now, with our strong Q3 results, we expect our full year EBIT-adjusted to be in the range of $14B to $15B, and EPS diluted-adjusted to be in the range of $10.00 to $10.50, both at the upper end of our previous guidance. And we are once again raising our adjusted automotive FCF.”
• Newell Brands ($3.7B, Household & Personal Products): ”EPS was at the high end of plan, driven by strong operational performance. We reduced Newell’s cash conversion cycle versus year-ago and we significantly de-levered the balance sheet to under 5.0x. The strong performance in the first nine months of 2024 gives us confidence to once again raise our outlook for the full year.”
• Brinker International ($4.6B, Restaurants): “Chili’s comps came in at positive 14.1%, driven by price of 6.8%, positive mix of 0.8%, and positive traffic of 6.5% with traffic improving sequentially throughout the quarter. These impressive results were driven by the continued success of our marketing campaigns on both TV and social media, highlighting our industry leading ‘Everyday 3 for Me’ value and our popular Triple Dipper appetizer. October comp sales to date for Chili’s remain in the double digits with positive traffic, and we continue to increase our gap to the casual dining industry. In terms of our expectations for the balance of the year, as noted in this morning’s press release, we’re raising our fiscal 2025 full year guidance.”

Affordability Challenges Continue to Weigh on Housing and Auto amid Uncertain Interest Rate Backdrop; Restaurants See Traction with Value Offerings

• Whirlpool ($5.7B, Furnishings, Fixtures & Appliances): “Demand in the U.S. has shifted significantly toward lower margin replacement-driven purchases, and the higher margin discretionary demand continues to be weak due to historically low existing home sales. Although the timing of the U.S. housing recovery is still uncertain, we are confident that the industry will have a multiyear recovery with the underlying housing fundamentals remaining strong.”
• D.R. Horton ($58.8B, Residential Construction): “We are seeing our buyers sit on the sidelines, sit on the fence, and a little less motivated today than they were previously in prior quarters. And affordability has been challenged. I don’t think this is a structural issue with demand. There’s just a lot of noise in the market today. With the rate volatility we’ve seen, combined with the election news that’s out there, we’re seeing people take a pause.”
• General Parts Company ($16.7B, Auto Parts): ”The weaker demand environment continues to be impacted by interest rates combined with persistent cost inflation and election and geopolitical uncertainty. These factors are impacting our customers, most notably with tightened budgets and reduced spending for capital projects in our Industrial business, and reduced spending in general maintenance and discretionary categories across our Automotive segment. We continue to hear from customers considering capital projects that they are pausing, not canceling, these plans until they have better visibility into the interest rate environment and the outcome of the election in the U.S.”
• Lear Corporation ($5.3B, Auto Parts): “Currently, macro conditions, including vehicle affordability, the regulatory environment and wage inflation continue to weigh on the automotive industry. The unprecedented transition to electric vehicles has caused near-term uncertainty around vehicle production. As customers assess their powertrain strategies, we have seen a delay in sourcing activity, particularly in North America and Europe.“
• Sonic Automotive ($2.0B, Auto & Truck Dealerships): “Elevated used retail prices remain a challenge for consumers, contributing to affordability concerns amid the current interest rate environment. However, the return to normal seasonal trends in used vehicle wholesale pricing are positive for our business outlook and, when combined with potential further interest rate cuts, should begin to benefit affordability and used vehicle sales volume in 2025.”
• Polaris ($4.0B, Recreational Vehicles): “Consumers remain cautious with discretionary spending, especially for larger purchases, and it will likely take more interest rate cuts and time to improve the financial position before spending returns on pre-pandemic levels.”
• McDonald’s ($209.9B, Restaurants): “[Our U.S. business] has significantly outperformed the QSR industry with comp guest count and traffic gaps at their highest point since the beginning of 2023. The $5 meal is doing exactly what we had set out to have it achieve. For the first time in over a year, we gained share with lower-income consumers. And we also saw that customers that were buying that $5 meal were visiting us more frequently. We ended Q3 on an upward trajectory in the U.S. business. So, a really strong finish to the end of Q3 and start to Q4 when you consider we were still operating in a very challenging broader industry context.”

“Judicious” Spending Patterns Seen Punctuated by Pullback on Big-ticket Items; Bifurcation Still in Focus with Higher Income Cohorts Driving Spend While Lower Income Consumers Face Increased Pressure

• O’Reilly Automotive ($68.43B, Specialty Retail): “In our view, the average consumer is still reasonably healthy, but we believe is exhibiting an element of caution when managing their pocketbook in an environment of uncertainty surrounding price levels, macroeconomic conditions, and an upcoming election.”
• McDonald’s ($209.9B, Restaurants): “The consumer is certainly being very discriminating in how they spend their dollar, and the inflation that has occurred over the last couple of years in the U.S. has certainly created that environment. While it may be more pronounced with the lower income consumer, it’s important to recognize that all income cohorts are seeking value.”
• General Motors ($58.9B, Auto Manufacturers): “With respect to credit, our charge-offs YTD at GM Financial are almost spot on what we expected. We did expect a modest moderation in credit YoY, and that’s exactly what we’re seeing. Our portfolio is heavily prime, and the prime credits have continued to perform very strongly with good employment levels, good household income, and still pretty strong household balance sheets. All in all, credit is developing very much in line with what we expected.”
• Tractor Supply ($29.0B, Specialty Retail): “I would describe the sentiment of our customer as relatively stable as supported by the recent jobs report and the current unemployment rate of 4.1%. Consistent with prior quarters, our consumer continues to be judicious with their spending, focused on innovation, newness, and needs-based products. YTD through Q3, the macro retail environment is running in line with the subdued expectations that we had as we entered the year.”
• Newell Brands ($3.7B, Household & Personal Products): “We are seeing a market bifurcation and consumer dynamics between low income versus higher income At lower income levels, there has been a significant decrease in unit volume compared with pre-pandemic levels, as these households are prioritizing spending on basic needs like food, rent, and insurance due to the cumulative impact of inflation outpacing wage increases. Conversely, the higher income households have increased spending significantly in both units and dollars, as these consumers are benefiting from home price appreciation and stock market gains. With higher income consumers driving the market, we are seeing stronger demand for more premium price products that represent a good consumer value.”
• Harley Davidson ($4.2B, Recreational Vehicles): “Overall, we continue to see greater spend from higher than lower income customers, as evidenced by motorcycle mix, where our CVO motorcycles continue to be up double-digit percentages throughout the year. In Q3, the global consumer has seemingly taken a pause from big-ticket consumer discretionary spend based on different dynamics in each region.”

Amid Challenging Top-line Environment and Competitive Pricing, Companies Highlight Operational Efficiency and Cost Management Efforts

• Garrett Motion ($1.7B, Auto Parts): “We find ourselves in a softer top-line environment. But the team delivered excellent operational performance, which translated into an adjusted EBITDA margin of 17.4%, a 160 bps increase compared to Q3 last year. Consistent operational execution in line with our financial framework allowed us to continue to increase margin this year as we flex our variable cost structure and implement sustainable fixed cost actions while still investing in new technologies.”
• General Motors ($58.9B, Auto Manufacturers): “The competition is fierce, and the regulatory environment will keep getting tougher. That’s why we’re focused on optimizing our ICE and EV margins. It all begins with our stellar ICE portfolio, where we’ve been able to maintain strong pricing compared to the industry, and our highly profitable full-size pickup and full-size SUVs continue to gain market share in their respective segments. We’ve been able to achieve these market share gains with significantly lower incentives than our competitors. This demonstrates the strength of our products and our disciplined go-to-market strategy.”
• PulteGroup ($25.9B, Residential Construction): “The gross margin is an important driver of ROIC, and we don’t want to give away lots that we’ve worked hard to secure. At the same time, we must be price competitive and offer a clear and compelling value to potential home buyers. Our Q3 results show this balancing act as we continue to generate historically high gross margins, but with meaningfully increased incentives in response to the more competitive market conditions in which we’re currently operating.”
• O’Reilly Automotive ($68.43B, Specialty Retail): “We would still characterize the acquisition cost environment as stable and would anticipate seeing a mix of both incremental cost improvements and modest inflation pressure as we finish out 2024. These cost dynamics are coupled with a pricing environment that remains rational across our industry.”
• McDonald’s ($209.9B, Restaurants): ”We still have pretty muted top-line growth, which is going to put pressure on margin from a percentage standpoint, because we still have cost impacts that are hitting the business. If you use the U.S. as a specific example, we’ve got just above mid-single-digit wage pressure, in large part from the more significant increases in California earlier in the year. In terms of pricing power, you’ve heard us talk a lot about the more challenging environment, particularly in our international markets. We still feel we can get pricing, but that is going to be at more conservative levels until we get the right momentum back in the business in each and every one of our markets.”
• Mohawk Industries ($8.6B, Furnishings, Fixtures & Appliances): “We remain focused on managing the controllable aspects of our business to enhance our results with gross margins under pressure from weaker industry demand. All of our businesses are implementing strategies to maximize volume and plant utilization. Our teams are executing the $100M of restructuring initiatives that we announced last quarter. Our businesses are making additional cost reductions in SG&A, operations and logistics. These actions will continue throughout next year to achieve our planned savings.”

Consumer Headwinds Persist in Europe; China Weakness Seen Continuing Near Term; India Remains a Key Growth Market

Europe

• General Parts Company ($16.7B, Auto Parts): “Starting in Europe, during Q3, overall market growth remained muted, down low single digits, which was consistent with Q2. The weak economic backdrop in Europe is being driven by an elevated level of deferred maintenance attributable to real wage declines, unemployment, higher interest rates and uncertain political and geopolitical situations. As we look at the economic backdrop in three key European markets, Germany, France and the UK, higher interest rates continue to negatively impact consumer purchasing power. Furthermore, higher unemployment rates and real wage declines in France and Germany have contributed to softer spending at the consumer level.”
• Ebay ($30.6B, Internet Retail): “In the UK and Germany, we continued to navigate more challenging macroeconomic condition and lower consumer confidence, while seeing strength in parts and accessories and improved trends in C2C volume.”
• Sketchers U.S.A ($9.4B, Footwear & Accessories): “We saw marked improvement in several of our international businesses, particularly in Europe, where our mitigation strategies to address supply chain delays bore fruit.

China

• Crocs, Inc. ($6.5B, Footwear & Accessories): “It is clear that the Chinese consumer is being far more conservative in their purchase behavior, and we’ve seen an even more pronounced pullback within key Tier 1 cities like Shanghai and Beijing. In light of the broader macro environment in China, we are taking a more cautious view for the rest of the year. Despite this backdrop, our brand continues to gain share in China, which we believe is a direct result of our accessible, authentic brand positioning, serving as a meaningful, competitive advantage.”
• VF Corp ($8.8B, Apparel Manufacturing): “You’re reading the same things we are in China. We have so much in our control that I’m not too worried about macro But it is true, the macro in China is a little softer than it has been.”
• Sketchers U.S.A ($9.4B, Footwear & Accessories): “Let me address the market in China, where macroeconomic pressures and its impact on the consumer are well-documented. Sales declined 5.7% YoY, which was below our initial expectations for the quarter. Our talented local team has responded by adjusting our near-term plans to navigate the uncertain situation, and we have modest expectations for the balance of the year, including Singles’ Day. Over the years, we have built an incredible brand in China and remain confident and optimistic about the long-term opportunities for Skechers in this market.”

APAC ex-China

• General Parts Company ($16.7B, Auto Parts): “The macro environment is also challenging in [Asia Pac], with Australia experiencing the weakest economic growth in nearly three decades and New Zealand currently in its second recession in 18 months. However, our teams are executing well, extending our industry leading position and taking market share.”
• Crocs, Inc. ($6.5B, Footwear & Accessories): ”In addition to China, we’re confident around India. We have a very attractive business model in India that has been impeded recently with the BIS. The Indian government has been imposing some restrictions associated with the need to make your products in India. We will have production up and running for both Crocs and HEYDUDE in India next year. It started this year, but it will reach enough supply to fund the market next year, so we’re confident about India.”
• Sketchers U.S.A ($9.4B, Footwear & Accessories): “In contrast to [China challenges], ..saw a rebound in India, where the continued collaboration between our local team, suppliers and regulators led to a meaningful turnaround from last quarter’s results. Demand for our product is strong, and we will continue to invest in this important market.”
• Whirlpool ($5.7B, Furnishings, Fixtures & Appliances): “We recently expanded our offering with a majority stake in Elica of India in 2021, and we just started the production of frontload washers in India, and we want to continue to invest in this business.”