Companies Boost Capital Spending, Betting Demand Will Stay Strong

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Spending on big-ticket goods such as new stores, warehouses and technology is expected to remain high in 2022

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Finance heads are facing challenges on several fronts when it comes to the capital-investment plan for 2022. Inflationary pressures are driving up the cost of raw materials and labor, increasing the risk of cost overruns. Regulators and investors are pushing companies to show that they are responsible for the environmental impact of their investments. And it remains to be seen how Omicron, or other Covid-19 variants, will affect the economic recovery and earnings of companies.

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A major reason for increasing capital expenditure is that executives have the cash to splurge on new stores, factories and other projects. S&P Global Market Intelligence said cash and equivalents in companies in the S&P 500 rose 11% during the third quarter to nearly $3.78 trillion. In the early days of the pandemic, many companies stored cash, which they are trying to reduce.

This year, capital spending by large companies worldwide is expected to increase by 6.1% from 2021 levels, according to S&P Global Ratings, which forecast includes 2,000 non-financial companies with the largest capital expenditures globally . In addition to the effects of the pandemic, other factors, such as investments by utilities and auto companies in the transition to clean energy, are pushing companies to spend more, said Gareth Williams, S&P’s head of corporate credit research.

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Costco Wholesale Corporation

, the retail giant that sells discounted wholesale goods such as food and household products, expects to invest about $4 billion during its fiscal year 2022, which ends in August, or about 10% more than a year ago. And about 42% more than the expenses. in 2020.

According to Bob Nelson, the company’s senior vice president of finance and investor relations, the increase in capital expenditure stemmed largely from store openings and investments in its logistics business. Mr Nelson said Costco—which is cash-rich and carries minimal debt—opened 20 net new stores globally in 2021, and is expected to grow to 28 this year.

The Issaquah, Wash.-based retailer operates 828 stores globally, mostly in the US, but also in countries including Canada, Mexico, Japan and the UK. The cost of opening a new store ranges from less than $30 million to more than $100 million, Costco said. Costco said total revenue rose 17% to $50.4 billion during the quarter ended Nov. 21 compared to a year earlier.

Darden Restaurant Inc.,

An Orlando-based company that operates restaurant chains such as Olive Garden and Longhorn Steakhouse is also building new locations. It expects to spend $425 million this fiscal year, mostly on new restaurants. After launching 36 during the last financial year, the company intends to open between 35 and 40 new locations this year.

Darden’s capital expenditures during its fiscal year 2021, which ended in May, were about $270 million, down 43% from the previous year, during which the company invested $475 million. The company halted all capital expenditure for several months starting March 2020, as the coronavirus pandemic hit its business.

The growth in corporate capital spending in 2021 is a reverse from 2020, when some companies delayed or postponed investments to increase their cash holdings. S&P Global Ratings said capital spending for large non-financial companies globally declined by about 4% in 2020 after rising about 2% in 2019.

“Once the pandemic cloud cleared many companies came back,” said Stuart Gleichenhaus, senior managing director of corporate finance at advisory firm FTI Consulting. Companies in the semiconductor, utility and airline industries plan to spend billions on new facilities and other assets in the coming years, Mr. Gleichenhaus said.

Chief financial officer Raj Vennam said on an earnings call last month that higher spending, due to inflation, is pushing Darden to spend more, but the company still expects strong returns. “Clearly, with inflation in this environment, construction costs on capital expenditure are going up a bit,” Mr Vennam said.

In addition to investing in capex, companies are pouring more money into stock buybacks, which hit a record high in 2021. Others are spending big on mergers and acquisitions.

The consultants said companies are also investing money towards cloud technology and enterprise systems. Chief financial officer Dave Wehner said on October’s earnings call that Facebook parent Meta Platforms Inc. expects $29 billion to $34 billion on capital spending in 2022, driven by investments in areas such as artificial intelligence and machine learning. This is up from about $19 billion in 2021.

Many companies, especially in capital-intensive industries like energy, have begun estimating the environmental cost of their investments as part of their budgeting process, said Ernesto Robles, managing director of Boston Consulting Group. Companies are doing this because of pressure from investors and regulators globally, Mr Robles said.

Delta Airlines Inc.

It said last month that the company’s plans to acquire new and more fuel-efficient aircraft are a key part of its effort to reduce carbon emissions. Finance chief Daniel Janaki said the Atlanta-based company plans to spend about $6 billion on capital investments this year. Delta expects to budget more in 2022 than in 2022 and 2020, when the company spent $2.9 billion and $2.2 billion, respectively.

Delta also wants to invest in new, sustainable sources of aviation fuel, but this will require time and technological innovation, Mr. Janaki said. “It’s going to … requires considerable cooperation and government support,” he said.

Mr Robles of BCG said many companies aim to capitalize on projects with environmental, social and governance considerations in mind. “They should immediately understand the implications of the ESG … and then they can make a decision,” he said.

Write Kristin Broughton at [email protected]

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