Margins results are mixed as earnings season kicks off

And just like that, earnings season is upon us. Few expected the fourth quarter to be as rosy as  years past, but there was one key indicator that analysts told CFO Brew they were keeping a close eye on: margins. With bank earnings in the rearview mirror, it was a mixed bag of results, and some retailers have begun to lower margin guidance while tech is still awaiting its turn.

For a quick refresher, there are three margin indicators that investors pay attention to: gross, operating, and net profit margins. Gross margin is revenue before profits, or the pure ticket price of a pie before all the ingredients are bought and labor is employed. Operating margin refers to the revenue minus operating expenses, so imagine the cost to sell the pie with a percentage of your kitchen rent cost deducted. Net profit margins calculate how much profit is realized from the revenue, so imagine how much goes into your pocket after all your expenses are paid and the pie is sold.

With banks in particular, analysts look at net interest income (NII) and net interest margins. This earnings season produced mixed results: JPMorgan’s net interest margin grew 48% from last year to $20.3 billion, Goldman Sachs’s net income fell $1.3 billion from an expected $2.2 billion, Morgan Stanley’s NII increased 49%, thanks to its wealth management division, while Citi’s profits declined by 21%.

Most earnings commentary from banking executives was positive but cautious. At the top of Citi’s earnings call, CEO Jane Fraser told analysts, “As we enter 2023, environments are far better than we all expected, for the time being at least.” JPMorgan’s CEO Jamie Dimon echoed that sentiment at the World Economic Forum in Davos, saying he’s more concerned about public policy (looking at you, Fed) than a recession. Goldman Sachs’s David Solomon started on a realistic note, telling analysts that the results were disappointing and the business environment proved challenging, but also that Q4 2022 wasn’t “normal.”

It’s misleading to compare Q4 data from last year to now, as earnings hit a high on margins at the end of 2021. Nearly two of every three publicly traded US companies reported higher profit margins in 2021 than they did before the pandemic, according to the Wall Street Journal. E-commerce giant Amazon, for example, posted an operating margin of 8.2% in Q1 2021 earnings, the highest the company had seen in a decade.

In 2022, the script on margins began to change—“Throughout 2022, increasingly, companies across the index struggling with margins just continued to broaden throughout 2022 [and] margins overall for the index were falling year over year for the second half of 2022,” Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, told CFO Brew.

Aside from banks, retail margins as a whole took a dip; the US Department of Commerce reported last week that retail sales were down 1.2% from November 2022. Additionally, the companies that have reported earnings are adjusting margins—fitness brand Lululemon Athletica Inc. posted a 90–110 basis point decline on gross margins. If you were hoping to up your legging collection as part of your New Year's resolutions, the company said that an uptick in discounts contributed to the profit decline, so you might still be able to head to the sales rack.

Still to come: Tech earnings, most of which are slated to be released in early February.

High profit margins, however, aren’t exactly favored by all financial institutions, specifically central banks. At the WEF in Davos, Portugal’s central bank governor, Mario Centeno, said that companies in the Euro zone’s high profit margins are making fighting inflation tough. Federal Reserve Chair Jerome Powell has stopped short of pointing directly to profit margins, which has angered senators and bank executives alike. In an effort to tame high profits, the central bank has raised interest rates over the past year, from which banks such as JPMorgan have benefited.

Earnings season is just getting underway so it’s safe to assume that a clearer margin, and economic picture will form. But like the banks presenting a mixed bag, margin growth or decline may not be equal across the board.—KT