As CFOs rely on cost reductions to meet earnings expectations in a cooling economy, they must avoid pursuing approaches that could compromise future performance.
Gartner, Inc. enumerated insights regarding this matter, noting on the recent experiences of S&P Global 1200 companies.
Insight 1: Cost Cuts Are Common but Not Deep - Sixty-four percent of companies in the S&P 1200 implemented cost-cutting measures such as employee layoffs, selling real estate from 2021 through mid-2023. However, these companies did not pursue significant cost cuts, as reflected by only a 5.3% reduction in the total operating expenses of these investment grade companies in the S&P Global Ratings. Over one-third of companies (35%) implemented one round of cost cuts, 40% implemented two rounds and around one-fifth of companies implemented three or more rounds.
Insight 2: Cost Cuts Are Mainly Reactive - Of the S&P Global 1200 companies that pursued cost cutting, 53% cut costs reactively as a result of declining profitability in the two successive quarters preceding their costcutting announcement (earnings before interest and taxes [EBIT]). Only 47% of companies cut costs proactively, i.e., despite positive EBIT growth in two consecutive quarters prior to their cost cutting announcement.
Insight 3: Headcount Reductions Are Relatively Rare but More Common in G&A - Given the current tightness in labor markets, only 11% of companies implemented workforce cuts in the past two years as a part of their cost-cutting measures. However, the prevalence of headcount reductions ranged across industries, from only 1% of companies in the real estate sector up to 24% of companies in the IT sector. Headcount reductions were generally modest: Two-thirds of companies reduced under 5% of their overall headcount, while only 7% resorted to layoffs of over 16% of employees.
Insight 4: Stock Price Gains From Cost Cuts Are Limited - An analysis of stock price movements of companies that announced cost cuts shows that most industry sectors saw minimal stock price appreciation from cost cutting a week after the announcement of cost cuts.
