Houses or Packaged Food, Anyone? Some Earnings Notes...

Ongoing consumer spending weakness and intensifying FX pressures among the themes

I wrote about General Mills’ guidance reduction yesterday morning; several more prominent companies reported their quarterly results yesterday evening/this morning. Fellow consumer packaged goods (CPG) company Conagra Brands reported its November quarter results (the second quarter of its fiscal year 2025), and like General Mills, Conagra cut its FY2025 profit guidance. Why? “Increasingly stretched consumers” prompting continued “brand investments”/promotions (which will reduce its price/mix and therefore its organic sales in F3Q), higher-than-expected cost inflation and unfavorable foreign currency (FX) translation. As the company’s CEO said, “Our revised guidance reflects both our prioritization of continued momentum with the consumer and our expectation that the inflation relief we previously expected in the second half of fiscal 25 is still forthcoming, but in fiscal 26. As I noted, economic pressures continue to shape consumer purchasing decisions. We're still seeing value seeking behaviors, with consumers prioritizing affordability and maximizing value.” Higher “brand investments” have become a theme among packaged food companies, which tends to happen when demand is weak.

Speaking of demand weakness, the french-fry maker Lamb Weston cut its guidance yet again and replaced its CEO amid ongoing declining restaurant traffic in the U.S. and other problems.

And the large homebuilder Lennar missed on earnings owing to lower deliveries and margins among other factors, and its new orders were well below guidance. Its CEO summarized the situation well, such that I’ll quote him at length. “In the course of our fourth quarter, the housing market that appeared to be improving as the Fed cut short-term interest rates, proved to be far more challenging as mortgage rates rose almost 100 basis points through the quarter. Even while demand remained strong, and the chronic supply shortage continued to drive the market, our results were driven by affordability limitations from higher interest rates. Accordingly, in our fourth quarter, sales pace lagged expectations as interest rates climbed and our new orders fell short of expectations to 16,895 homes vs the low end of our guidance of 19,000 homes. Consistent with our strategy of matching sales pace with production, we adjusted sales price, incentives, and margin in order to re-ignite sales and actively manage inventory levels. We ended the quarter with two completed, unsold homes per community, which was within our historical range."

Conagra is using higher “brand investments” and Lennar “incentives/sales price” to stimulate demand; declining affordability has become a problem in several industries owing to the substantial cumulative inflation over the past four years.

The ever-strengthening U.S. dollar is another problem for corporate America. I noted the impact on Conagra’s earnings guidance earlier. The large IT services company Accenture reported its fiscal first quarter 2025 results (quarter ended November); while it raised its fiscal 2025 local currency revenue guidance, it reduced its GAAP EPS guidance by ~1% at the midpoint owing to an adverse FX translation impact. I expect ongoing consumer spending weakness and adverse currency-related impacts to be recurring themes in the forthcoming 4Q earnings season.

I’m writing about consumer spending weakness as the Bureau of Economic Analysis (BEA) just upwardly revised its estimate of the 3Q real GDP growth rate to 3.1%, such that GDP growth remains above-trend. So where’s the problem? The BEA reminded us yet again where the growth in consumer spending/PCE (which accounts for ~68% of GDP) is coming from. “Within goods, the leading contributors to the increase were other nondurable goods (led by prescription drugs) and motor vehicles and parts (led by used light trucks). Within services, the leading contributor to the increase was health care (both outpatient services and hospitals).” In other words, thank you health care spending, which I’ve written about at length in recent weeks (link and link).