The coronavirus pandemic has unintended consequences beyond health risks. Outbreaks are sending workers home in critical industries, reducing economic output. Meanwhile, consumer demand has stayed resilient amid several rounds of government stimulus in many countries.
The imbalance between robust demand and constrained supply is driving up prices. Indeed, the Consumer Price Index rose 7.5% in the 12 months ending in January. Inflation can have varying effects on businesses depending on how they are structured. What follows is a look into why it's good news for AMC Entertainment Group (AMC 3.67%) and not so much for DoorDash (DASH 1.68%).
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AMC
Rising inflation can be good for AMC because a high degree of its costs are relatively fixed, meaning they will not grow as inflation rises. For instance, despite the rising costs throughout the economy, AMC's rent expense stayed relatively flat year over year in its quarter ended Sept. 30.
What's more, AMC has $5.4 billion of debt on its balance sheet. Regardless of how much inflation rises, it will not increase the sum of that debt or the interest expense it has agreed to pay. In its most recent quarter, for AMC, rent and interest expenditures totaled $214.9 million and $88.7 million, respectively. To put those figures into context, AMC generated $763 million in revenue in the quarter ended Sept. 30.
Rising inflation is also strategically positive for AMC. Consumers are paying higher prices for many things in their lives, including transportation, food, fuel, and more. Management can keep prices flat at AMC, making its services relatively more attractive to consumers. Or it can raise prices on tickets and concessions to match rising prices elsewhere.
NYSE: AMC
Key Data Points
AMC has chosen the latter and increased ticket prices by 16% domestically and 17% internationally in third-quarter 2021 compared with Q3 2019.
Of course, AMC will experience higher costs in some areas of its business, as it is not entirely immune from inflation. For instance, it may need to pay more for food and beverage inputs. However, that is a highly profitable segment that generated $265 million in revenue and $42.9 million in costs in Q3.
Overall, AMC's high fixed costs allow it to weather inflationary periods well. The business model has the additional benefit of improving profitability with expanding sales. That's evident in AMC's year-over-year improvement in net loss, decreasing from $906 million in Q3 2020 to $224 million in Q3 2021 while revenue increased from $119 million to $763 million.
DoorDash
Food delivery company DoorDash is not built to benefit from rising inflation. Large parts of its costs are variable. If a consumer orders a meal for delivery, DoorDash earns revenue and must pay the driver for the service. DoorDash only incurs that cost if there is an order from a consumer. Otherwise, the driver sits idle and does not get paid.
To look into DoorDash's variability in costs, consider that it increased revenue by roughly $2 billion in 2021 from 2020. At the same time, its costs increased by approximately $2 billion. The result was that DoorDash's loss from operations increased by $16 million in 2021, despite boosting revenue by $2 billion.
If there is rising inflation in the economy, drivers will demand higher wages for their services. That's understandable. If they need to pay more for their car, fuel, and maintenance, they will want compensation to accommodate the increases. Otherwise, they may choose to work for a competitor or a different line of work entirely.
The variable nature of its costs fails to insulate DoorDash from inflation. For that reason, it does not benefit.
Investor takeaway
Investors looking to take advantage of rising inflation need to consider companies' business models and determine the degree to which their costs are fixed versus variable. The more fixed, the more insulated they will be from inflation.
