The unrelenting surge in consumer prices has taken the air out of the Federal Reserve’s fight against inflation’s upward spiral. Just when it appeared the economy was turning a corner, a new batch of troubling data shows inflation remains stubbornly entrenched, muddying the central bank’s path forward on interest rates.
The Bureau of Labor Statistics’ latest monthly report delivered another shock – the Consumer Price Index climbed 3.5% over the past year through March. The acceleration defied estimates of a 3.4% rise and marked the fourth consecutive month that inflation exceeded projections. Wild swings in costs for essentials like auto insurance, transportation, and housing are keeping the headline inflation figure well above the Fed’s 2% target.
The persistent price pressures throw a wrench in the Fed’s plans to pivot from its aggressive rate hiking campaign of 2022-23 to eventually cutting rates and providing economic relief. With each upside inflation surprise, the prospects of the central bank taking its foot off the brake pedal diminish. The interest rate futures markets have already adjusted, with traders now pricing in higher odds of the Fed’s first rate cut getting pushed back from July to September at 69% probability.
As the fight to tame inflation drags on, the impacts are reverberating across different segments of the economy in uneven ways. While some industries have been able to pass through rising costs to consumers, other businesses are finding it exceedingly difficult to stay profitable and maintain pricing power. Consumer discretionary companies in particular face escalating risks as higher borrowing costs, dwindling savings, and stagnant wages squeeze household budgets.
Nike (NKE) Feels the Inflation Pincer
For Nike, inflationary forces are hitting the athletic apparel maker from both sides. Soaring expenses for freight, logistics and manufacturing have eroded profit margins at the same time elevated consumer prices are capping revenue growth by sapping discretionary spending power.
In its fiscal Q3 2024 earnings report, Nike revealed stagnant quarterly sales of $12.4 billion, up just 1% from a year earlier. The company’s once-enviable gross profit margin slipped to 44.75% as cost pressures weighed. Shares have tumbled 13.7% year-to-date as a result, pulling Nike’s stock price down near its 52-week low of $88.66 hit last year.
Compounding Nike’s woes are rising competitive threats. Smaller upstart brands like On Holding (ONON) and Hoka, owned by Deckers Outdoor Corp (DECK), have been aggressively taking market share amid Nike’s struggles. Rampant retail theft issues also weighed on results.
Looking ahead, Wall Street analysts have an average 12-month price target of $111.32 on Nike shares, implying modest upside potential. However, if inflation persists, earnings could continue eroding and spark further selling that drags the stock as low as $81 per share based on worst-case forecasts. The highest analyst target sits at $130.
Beyond Meat (BYND) Too Pricey For Pinched Consumers
In the plant-based meat industry, persistently elevated consumer prices have put a major damper on Beyond Meat’s ability to attract mainstream demand and convert Americans to its meat-alternative products. As households prioritize essentials and look to cut costs, premium-priced protein substitutes have fallen out of favor.
Beyond’s stock reflects this harsh reality, plummeting 53% over the past year to trade at just $7.14 per share after reaching as low as $5.58 in the past 52 weeks. The company has now posted negative year-over-year revenue growth for seven straight quarters dating back to Q2 2022 as sustainable purchasing power for its products cratered.
Even more concerning is Beyond Meat’s seemingly endless streak of losses – it has reported a net deficit every quarter since mid-2020. The company hemorrhaged $155 million in Q4 2023 alone, its largest quarterly net loss yet which dwarfed the $67 million deficit a year earlier.
With such a capital-intensive business model and an inherently high pricing structure, inflationary environments are a worst-case scenario for Beyond Meat. Bargain-hunting households show little appetite for pricey, plant-based proteins when real meat is relatively more affordable.
The dismal operating trends help explain why over 35% of Beyond’s shares are being shorted by investors betting the stock will keep falling. Analysts’ consensus 12-month price target of just $6.86 offers little relief, with bearish projections calling for shares to drop below $3 if financial struggles persist.
Whirlpool (WHR) Feels Households Postponing Purchases
For consumer appliance giant Whirlpool, few factors are more damaging to sales than eroding discretionary spending power. As one of the world’s largest manufacturers of refrigerators, washing machines and other home appliances, the company noted declining demand in these big-ticket purchase categories as inflation spiked.
“We continue to see an environment where the discretionary part of our business is under pressure,” Whirlpool CFO Jim Peters bluntly stated in January while providing a sobering outlook. The company cut its 2024 revenue forecast to $16.9 billion, down markedly from the $17.7 billion analysts were expecting based on prior guidance.
Management also slashed its earnings per share estimates, guiding for just $8.50 to $10.50 in profits this year compared to 2023’s reported EPS of $8.72. The lower end of that range looks increasingly plausible if inflation persists and further squeezes the budgets of potential appliance buyers.
The pressures are already manifesting in Whirlpool’s stock price, which has dropped 12.7% so far in 2023 to trade at $112.72 per share. Its 52-week low of $98.40 looms large if inflation trends continue higher and poor results accelerate the sell-off.
Wall Street has mixed opinions on how much further downside could materialize. While the average analyst price target of $99.75 implies over 10% downside risk, more bearish forecasts see shares crashing as low as $63 if high inflation persists and appliance purchases are postponed on a larger scale. The highest bull case among analysts sits at an optimistic $140 target.
As the economic data increasingly points to inflation proving stickier and more stubborn than expected, pressure is building on the Fed to maintain its hawkish policy stance and keep rates elevated for longer. For discretionary consumer companies like Nike, Beyond Meat and Whirlpool, the effects could be devastating if household budgets remain strained. For these businesses, pricing dynamics and profit margins leave little room to offset the inflationary spiral crippling demand from tapped-out buyers.
