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More on SG&A Costs in S&P 500
Friday, June 8, 2018

So we were thinking more about last week’s post on Dollar General, and how the increase in its Sales, General & Administrative costs in the last quarter (12 percent) outpaced the growth in revenue (9 percent). A mismatch like that can be a warning sign of trouble, depending on a company’s specific circumstances.

So what does the data tell us about the S&P 500 in the aggregate, we wondered? Are lots of companies in a similar situation?

We decided to take a look.

First, we found 456 companies in the S&P 500 that have already filed first quarter reports for 2017 and 2018; and reported both revenue and SG&A numbers in both quarters. (A few didn’t report one number or the other, for various reasons.)

Next we measured the percentage growth in both revenue and SG&A, from Q1 2017 to Q1 2018. And then we subtracted the growth in SG&A from the growth in revenue, to get the “spread” between revenue and SG&A growth — that is, to determine which line item grew faster, and by how much.

Here are a few examples.

As you can see, a negative spread means your SG&A costs are growing faster than your revenue. The larger (lower?) the negative number, the worse off the company is.

So even though Waste Management didn’t see spectacular revenue growth, it cut its SG&A costs. So long as its costs of goods sold (or cost of services provided) didn’t exceed revenue growth either, then by definition its operating profit would increase. On the other hand, Hasbro saw its revenue fall while SG&A costs rose, not a welcome combination at all.

Among all 456 companies we examined, the spread was a positive 1.77 percent: revenue grew by 9.64 percent, SG&A costs by 7.86 percent. That’s the good news.

Then again, consider the implications of that margin. Operating profit is simply what’s left over after you deduct cost of goods (or services sold) and SG&A costs from revenue. So if your cost of goods rises sharply — like, say, because the United States enters a trade war and we have tariffs all over the place; or oil prices spike; or energy costs rise — then you must keep your SG&A costs down (which would be a positive revenue-SGA spread), or you’ll be buying red ink.

Out of the 456 companies we studied, 206 of them had negative revenue-SGA spreads: their overhead costs were rising faster than revenue. We didn’t look at their cost of goods sold.

You might want to do that yourself. Net income is looking great these days thanks to the corporate tax cut enacted last year, but for lots of companies that might be a lot of where their profit growth is coming from. (Deere being one example.)

One year from now, when we’re comparing profit growth from one post-tax cut quarter (in 2019) to another (in 2018) — well, there might be less profit to go around than we expected.


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