CFOs start the year with a multitude of challenges, from rising interest rates and inflation to managing work stoppages, prices and inventories. Still, many are cautiously optimistic.
While parts of the economy are weak and heavily indebted companies could face funding difficulties and default risk in the current environment, panelists at the Wall Street Journal’s CFO Network Summit on Wednesday said companies in healthy sectors should be able to weather headwinds battle.
“All of our clients … have been preparing for a downturn in the economy,” said Carmine Di Sibio, global chairman of Big Four accounting firm Ernst & Young. “But… there’s a growing belief that any kind of downturn is going to be brief and shallow, frankly. That seems to be taking over, you know, what was a very, very negative outlook five or six months ago.”
CFOs, lawyers, decision makers and other leaders spoke about these topics and more at the Journal’s biennial summit. Here are some of the highlights of the conference, held in person in New York for the first time since the pandemic began three years ago.
Restrictive monetary policy
With executives largely optimistic that a downturn will be short-lived, Federal Reserve Bank of New York President John Williams opened the day’s discourse by saying the economy will need higher borrowing costs for a number of years to bring inflation down and prevent price pressures from intensifying.
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The Fed is raising rates again this year — albeit at a gentler pace than last year’s fastest string of hikes in decades — raising rates by a quarter of a point this month to a range of 4.5% to 4.75%.
“We need a sufficiently hawkish stance” on interest rates, Mr Williams said, adding “that we need to maintain that for a couple of years to make sure we get inflation to 2%.”
Fed officials generally expect rates to range between 5% and 5.5% this year.
Some CFOs, meanwhile, are finding ways to expand in the volatile economy. Academy Sport & Outdoor inc
CFO Michael Mullican
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told analysts in December his company plans to open between 80 and 100 new stores by the end of 2026.
The CFO said on Wednesday he hoped landlords would offer better terms as some retailers closed locations. “[We] I haven’t seen that yet, and that’s about to change,” he said. “There are a couple of big retailers that might have some availability, which will certainly help us.”
In addition, costs associated with expansion, such as spending on materials, including steel, and construction debris, are stabilizing, Mr Mullican said. At the same time, inventory challenges are improving, he said, as the retailer has more say in the goods they sell.
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“The dynamic has changed quite a bit. When we got it last year, we took it and sold it,” he said. “Now you can push back part of the inventory. You cannot take everything your suppliers send you.”
Work problems persist
However, hiring remains a challenge for CFOs. US job growth accelerated earlier in the year, with employers adding 517,000 jobs in January and pushing the unemployment rate down to 3.4%, a low in more than five decades.
“The best-selling album according to Billboard when the unemployment rate was 3.4% last time was The Beatles’ ‘White Album,'” said Mr. Williams of the New York Fed. “We’re talking about more than 50 years here.”
With that in mind, Academy aims to be competitive with hourly rates for staff in its branches and to provide opportunities for growth in corporate functions, Mr. Mullican said. The Katy, Texas-based retailer also sees benefits from recent layoffs that have roiled companies, particularly those in the tech sector like Microsoft corp
and Google’s parent Alphabet inc
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“We had a challenge bringing people to Houston,” he said, referring to Katy’s neighboring city. “They want to be in Austin or on the west coast or, frankly, somewhere close by [New York City]. We’ve had some good successes at this rate lately with all the layoffs.”
Still, recruitment as a whole remains a struggle, and “I don’t think it’s going to get any easier,” Mr. Mullican said.
“People think, ‘Oh, there are layoffs here and layoffs there.’ It’s still difficult to attract tech talent,” said EY’s Mr. Di Sibio. “The job market, I think, is unreal,” he added, noting that “I think the tightness of the job market will continue.”
difficulties in raising capital
Some companies are also finding it difficult to raise capital, in part for acquisitions, as the Fed continues to hike rates. While investment-grade companies are largely able to weather a slowing economy, lower-rated companies are particularly at risk, said Paloma San Valentin, head of the North American corporate finance group at rating agency Moody’s Investors Service.
“Our concerns are at the low end of the rating scale,” Ms. San Valentin said, referring to companies with bloated balance sheets and significant debt.
Capital-intensive companies will also face a tougher environment to raise capital, although this varies by company and industry, said Michal Katz, head of investment and corporate banking at investment bank Mizuho Americas.
These challenges are motivating some companies to rely more heavily on private credit, which plays a more important role in large deals than traditional mid-size deals, Ms Katz said.
E-commerce software company Cart.com Inc. is on the lookout for acquisitions, but financing for deals is hard to come by, Chief Financial Officer Frank Parker said. “I don’t think anybody wants to buy something that’s cash flow negative,” he said.
Some companies are likely to do business out of necessity, Mr. Parker added. “You’re going to see companies merging because they just don’t make sense as standalone companies in terms of cost structure,” he said.
Extended climate data
The Securities and Exchange Commission’s proposal to expand climate-related disclosures by public companies was controversial even within the agency. The Commission may hold back, particularly on its proposed Scope 3 requirement for some companies to provide disclosures on emissions along their supply chains, said Kelly Gibson, former head of the Enforcement Division’s climate and environmental, social and governance task force the SEC.
“Scope 3 is one of the most controversial parts of the proposal and I think it is the biggest challenge for companies,” said Ms. Gibson, who now works at the law firm Morgan Lewis & Bockius LLP. “I could see the commission dialing it back a bit.”
But the focus on climate will remain even if the SEC has just “evaporated,” said Kristina Wyatt, a former senior climate and ESG advisor to the SEC who now works as deputy general counsel at climate accounting platform Persefoni.
“The focus on climate change as a financial risk and as a disclosure point will not go away,” Ms Wyatt said, noting that overseas investors and regulators are still focused on climate risk.
As companies wait and see how things unfold in the SEC’s regulatory process, they should take the time to conduct a self-assessment to see if they’re ready to comply with new reporting requirements, regardless of form, she said.
“Probably the focus is too much on reporting and that can be a check-the-box exercise which I don’t think is helpful instead of thinking about how climate presents financial risks and opportunities and what your companies are doing about it “, said Mrs. Dr. said Wyatt.
Businesses face more activists
Aside from the push for improved ESG disclosures, companies are seeing increased shareholder activism as share prices tumble. Both the number of activists and the campaigns have skyrocketed, said Mary Ann Deignan, head of capital markets at financial advisory and wealth management firm Lazard GmbH.
“It’s been an extraordinarily aggressive market, with activists seeing opportunities to invest in sectors and in individual companies where they’ve never really had an opportunity before,” she said.
“Last year activism in the United States increased by over 40%,” added Ms. Deignan.
Activists are looking for good assets, an undervalued company and an opportunity to make changes that may include a push for a board seat, she said. CFOs who want to avoid being attacked by activists need to know what shareholders care about, what they think are good capital allocation strategies and whether they have good access to management, Ms Deignan said.
“Just do everything right,” she said jokingly.
Write to Jennifer Williams-Alvarez at [email protected], Mark Maurer at [email protected] and Richard Vanderford at [email protected]
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