Real GDP, Chipotle’s Q2 Beat, and Tesla’s Shrinking Profit Margins
Editor’s Note: We made it to Friday, gang!
Now let’s get to it!
Commerce Dept. Reports Higher-Than-Expected GDP Growth for Q2
According to a report from the U.S. Commerce, economic activity remained much higher than expected in the second quarter.
Real gross domestic product (GDP) — which includes all goods and services produced during the period — rose at an annualized pace of 2.8% (adjusted for seasonality and inflation). That’s double the first quarter’s growth rate of 1.4%.
According to Dow Jones, analysts had been expecting 2.1% growth.
Strong consumer spending helped push GDP higher. Consumer spending accounts for roughly 70% of the GDP.
The Bureau of Economic Analysis (BEA) reported that personal consumption expenditures rose 2.3% for the quarter. That’s higher than the 1.5% growth reported for the first quarter of 2024. The BEA indicated that spending on goods and services both rose.
In addition, the Personal Consumption Expenditures (PCE) Price Index — one of the Federal Reserve’s favorite economic gauges — rose 2.6% in the second quarter. That’s lower than the 3.4% growth reported in the first quarter of the year.
Stripping out volatile food and energy prices, the core PCE rose 2.9%, versus 3.7% in the first quarter.
Although prices are still on the rise, inflation is heading closer to the Fed’s target of 2% year-over-year growth.
The central bank’s Federal Open Market Committee (FOMC) meets next week and is expected to keep its benchmark interest rate the same. However, the CME Group’s (NSDQ: CME) FedWatch Tool indicates that the Fed futures market is pricing in a nearly 88% chance that the FOMC will slash rates by 25 basis points at its September meeting.
Nearly 12% are expecting a much more ambitious 50-basis-point cut.
Chipotle Reports Wall Street-Beating Earnings
This week, Chipotle Mexican Grill (NYSE: CMG) indicated that customers still can’t get enough of its burritos.
While other fast-casual and even fast-food restaurants have warned of a slowdown as consumers tighten their belts against higher prices, Chipotle reported higher traffic at its locations.
Chipotle reported a nearly 9% increase in traffic at its restaurants. This took investors by surprise — particularly because Chipotle has been on the receiving end of viral social media criticism about portion sizes.
According to management, the restaurant hasn’t intentionally been making smaller burritos and burrito bowls. Instead, Chipotle argues, it has to do with uneven employee training.
“We have focused in on those with outlier portion scores based on consumer surveys, and we are re-emphasizing training and coaching around ensuring we are consistently making bowls and burritos correctly,” CEO Brian Niccol said on an earnings conference call.
“We have also leaned in and re-emphasized generous portions across all of our restaurants, as it is a core brand equity of Chipotle.”
According to Niccol, the restaurant chain is seeing an increase in restaurant transactions across all customer income levels despite price hikes — something that rivals such as McDonald’s (NYSE: MCD) have not experienced.
That helped Chipotle report second-quarter net income of $455.7 million, or 33 cents per share. That’s a significant increase from the profit of $341.8 million, or 25 cents per share, that the company reported for the year-ago quarter.
Excluding items, Chipotle’s earnings came out to 34 cents per share — higher than the 32 cents adjusted Wall Street had been expecting.
Revenue for the quarter also beat analyst expectations, coming in at $2.97 billion versus $2.94 billion. That’s an 18.2% increase from the previous quarter.
In addition, Chipotle reported an 11.1% increase in same-store sales, beating analyst estimates of 9.2% growth, according to StreetAccount.
The restaurant chain is maintaining its full-year outlook for mid- to high-single-digit same-store sales growth. The company expects to open as many as 315 new locations this year. During the second quarter, Chipotle opened 52 new restaurants.
Tesla’s Profit Margins Are Rapidly Shrinking
Shares of Tesla (NSDQ: TSLA) dropped this week after the electric vehicle (EV) maker reported worse-than-expected second-quarter earnings.
On Tuesday, Tesla reported that overall revenue rose 2% versus the year-ago quarter, from $24.94 billion to $25.50 billion. Revenue was also higher than the $24.77 billion that analysts had been expecting, according to LSEG.
However, revenue from Tesla’s automotive division fell 7% on a year-over-year basis, to $19.9 billion. That included the regulatory credits that Tesla has long leaned on for profitability. In the second quarter, the carmaker earned $890 million from credit sales.
And although Tesla reported better-than-expected delivery counts for the second quarter, deliveries were still lower than in the year-ago quarter. This marked the second consecutive quarter of dropping delivery figures.
Tesla’s profits also shrank considerably in the second quarter.
Tesla has had to offer special financing promotions and even slash prices on many of its models in order to court consumers. The company is struggling against both increasing competition and decreasing demand.
Take a look at the following infographic, which shows how these measures have eroded Tesla’s profit margins over recent quarters.
The EV maker’s profit margin may have peaked at nearly 30% in 2022 but has fallen to below 15% in the most recent quarter.
Take a look:
You will find more infographics at Statista
Part of Tesla’s problem is the enormous amount of money it is spending on artificial intelligence (AI) projects that the company’s controversial CEO, Elon Musk, swears it needs to install humanoid worker robots in its factories. In addition, Tesla is counting on AI for its long-held promise of self-driving cars.
But sales of Tesla vehicles haven’t kept up with the AI spending. Consumers just haven’t been as willing to purchase the company’s high-priced vehicles, leading Tesla to offer loan incentives and engage in a price-cutting war with other EV makers.
Those incentives included a five-year zero-interest loan offer for Chinese customers. In China, Tesla faces its fiercest competition from EV companies such as BYD (OTCMKTS: BYDDY) and Nio (NYSE: NIO).
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