Thursday, October 5, 2023

Worries about the high cost of labor and services persist in Corporate America, even as various economic indicators suggest that the job market and the economy overall are cooling. Today the crack Calcbench research team wanted to explore that issue by asking a specific question.

Are revenues keeping pace with Sales, General, and Administrative costs? 

SG&A costs include employee compensation, office supplies, shipping services, utility bills, paper clips, coffee filters — really any expense not directly related to your costs for producing a good or service. Put simply, SG&A is overhead costs. 

One might naturally expect SG&A expenses to rise as your business grows and you need more stuff. Then again, SG&A costs can also rise due to external factors such as a labor shortage, supply shortages, or general inflation. Lately we’ve had all three of those factors in spades. Hence we were curious whether revenues are rising faster than SG&A cost, so companies can protect operating margins. 

To answer that question, we looked at SG&A expense as a percentage of revenue for the last 18 quarters, from the start of 2019 through Q2 2023. Even better, we compared those numbers for two groups: companies in the S&P 500, and all companies with less than $500 million in annual revenue (a group of about 8,200). 

The results are in Figure 1, below; and they are as striking as they are clear. 

Among the S&P 500 (the red line in Figure 1), SG&A costs have remained relatively stable as a percentage of revenue, even through the pandemic in 2020, the shortage-driven years of 2021 and 2022, and the whatever-it-is we’re calling 2023. SG&A costs fluctuated from 14.5 to 17.1 percent, quite a narrow range.

At the same time, however, smaller companies have gone through an SG&A wringer. They started from the far higher base of 33.9 percent of revenue at the start of 2019, then popped above 46 percent twice in 2021 and 2022. The numbers have declined a bit this year, but are still well above that baseline of 33.9 percent before the pandemic.

What can financial analysts do with that information? For starters, understand the pressure that smaller firms are under. If SG&A costs are a bigger part of the cost structure, management needs to pay more attention to issues such as wages and operating expense; cost management becomes more important. You can also have a more nuanced appreciation of how supply chain and labor market pressures might affect operating margins, unless that small-company management comes up with new ways to grow revenue. Those are all good questions to ask the CEO and CFO on the next earnings call. 

And while the Calcbench team didn’t explore this angle, you could also study SG&A costs by specific industry. We used our Bulk Data Query tool to pull all these numbers; you can do the same, selecting a peer group that reflects a certain industry, NAIC code, or even other filters such as revenue or asset size. 

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