Daily Spotlight: Profit Margins Widened in 2Q

Summary

Second-quarter earnings season is winding down, as the retailers wrap up their reports. The overall growth rate is set to land in the 12% range, an improvement from the high-single-digit rate in 1Q. There are three drivers to EPS growth: higher sales, a wider operating margin, and a reduced share count. A decline in shares outstanding, which is the result of corporate share buybacks, is the lowest-quality driver of EPS growth. Higher sales — as customers demand and pay for more products and services — is the highest quality, especially when those sales totals are driven by an increase in volume. (Second-quarter revenue growth was about 5%.) Margin management is in the middle. Consistently wider margins, quarter after quarter, are often a sign of a good management team, which is more often able to grow revenues faster than it grows costs. But that’s a tall order in periods of high inflation (which raises the prices of Cost of Goods Sold) and of high interest rates (which result in higher financing costs). What’s more, there’s a cap to margins as they don’t rise indefinitel