Where will Americans spend their next dollar? CEOs are getting worried

At what point do consumers say enough is enough when it comes to paying more for goods and services?

The question is top of mind for C-suite executives, regardless of industry, as inflation surges to levels not seen in decades. And as earnings season begins, so are the concerns about balancing the rising costs and the consumer.

“Either businesses are going to make a lot less money or they’re going to raise their prices,” RH CEO Gary Friedman said on the company’s earnings call on March 30. “I don’t think anybody really understands how high prices are going to go everywhere. … I think it’s going to outrun the consumer, and I think we’re going to be in some tricky space.”

Consumer prices rose 8.5% from a year ago in March, according to Labor Department data. That data reflects a rise that the U.S. has not seen since the late 1970s and early 1980s, with core inflation being the hottest since August 1982. The Producers Price Index, which measures what wholesalers are paying, posted its biggest rise year over year on record, up 11.3% in March.

So far in 2022, rising prices haven’t significantly slowed consumers down. Year-over-year retail spending was up 17.6% through February, according to the Commerce Department, and January spending was revised up to an increase of 4.9%, well ahead of the initial 3.8% estimate.

That continued strong demand is providing an opportunity for many companies to offset the increased pricing they’ve seen for materials and supply chain costs by passing it along to customers.

Nike upped its gross margin expectations by at least 150 basis points versus the previous year because of the “benefits of strategic pricing,” CFO Matt Friend said on the company’s most recent earnings call on March 21.

Conagra reported that its organic sales were up 6% in its most recent quarter even as volume declined 2.6% percent. The reason for that? Price/mix was up 8.6%. CFO Dave Marberger said on the company’s April 7 earnings call with analysts that the volume decrease was “primarily due to the elasticity impacts of the price increases.”

A hot job market, low unemployment and a historically high rate of savings have buoyed Americans, making them more willing to pay higher prices for goods and services. But while wages have grown, they have not kept pace with inflation. Real earnings were up 5.6% from a year ago while real average hourly earnings had a seasonally adjusted 0.8% decline last month, according to Bureau of Labor Statistics data.

There are signs the consumer strength is getting more tenuous, starting with a key earnings read from the used car market on Monday.

CarMax saw its used car unit comps drop 6.5% in its most recent quarter even as its used car revenue rose 32.6% due to average selling prices that skyrocketed. The company cited a number of macro factors as to why sales dropped, including “declining consumer confidence, the Omicron-fueled surge in COVID cases, vehicle affordability, and the lapping of stimulus benefits paid in the prior year period.”

Forty-eight percent of Americans said they are thinking about rising prices all the time, according to a CNBC survey released last week. Furthermore, 75% said they are worried that higher prices will force them to rethink their financial choices in the coming months.

To combat higher prices, there are several things that Americans say they are doing. Fifty-three percent said they have cut back on dining out in the last six months, while 35% said they’ve canceled a monthly subscription and 29% were forced to cancel a trip or vacation.

On top of that, 32% said they’ve already switched from a brand-name product to a generic version.

Historically, high earners have been a safe haven for companies when it comes to continuing to spend even through rough times. But even 68% of respondents with incomes of $100,000 indicated they’re worried about higher prices making them change financial decisions.

Chipotle Mexican Grill CEO Brian Niccol said on CNBC’s “Closing Bell” on Friday that while the company “continue(s) to see strength in the consumer,” that he thinks “they’re going to continue to be more discriminate going forward as they decide how to spend their dollars.”

“Our data tells us people are thinking twice about how far they want to drive, how often they want to drive; they’re also thinking twice about whether or not they want to spend their dollar on a restaurant experience or an entertainment experience,” Niccol said. “I just think it’s becoming more of a, I would say, conscious decision on how they’re going to choose to spend their next dollar versus maybe a couple of months ago.”

Niccol said Chipotle, which previously said it raised prices by roughly 6% so far this year resulting in customers paying about 10% more for their orders than a year ago, has “the pricing power to take the pricing when we need to.” However, he also noted that he “would love not to have to keep taking price, but we’ll have to see how everything unfolds going forward.”

CNBC research suggests that S&P 500 companies are expected to show earnings growth of 6.4% in the first quarter of 2022 and 6.8% in the second quarter, ultimately leading to about 10% growth across the second half of the year. But that is largely being driven by the energy sector, which is projected to have earnings growth of 233.5% in the first quarter.

In comparison, the consumer staples and consumer discretionary sectors are estimated to have a 1.9% and -11.9% earnings growth in the first quarter, a harbinger that the consumer spending and demand of the Covid era might finally be hitting a wall.