It is hard to buy food or pay rent when you are unemployed. Double-income families can usually handle the effects of unemployment by relying on one income instead of two. In this situation, families are forced to cut back. Right now the world economy is growing, and people are spending more. The falling unemployment rate has caused a number of low-cost companies to suffer.
US Unemployment Rate: Age 25 and Over With High School, No College data by YCharts
Fast Food
The company’s sudden growth after the 2008 recession probably won’t be repeated any time soon. Its one year revenue growth rate of 2.1% is far below its five year revenue growth rate of 3.9%. On the positive side, the company enjoys a profit margin of 14.9%.
Yum! Brands, Inc. (NYSE:YUM) is not immune to China’s improving employment prospects. More of China’s workers are moving to the cities in search of higher paying jobs. Yum! Brands, Inc. (NYSE:YUM) serves these Chinese consumers who are looking for a little extra without breaking the bank. The company has made a major bet on China and of its $13.6 billion 2012 revenues, around $6.9 billion came from the company’s China division.
Yum! Brands, Inc. (NYSE:YUM) has some major short term difficulties. In its first quarter results, KFC same store sales in China fell by 20% after a supplier sold meat with too many antibiotics. Considering the situation, Yum! Brands, Inc. (NYSE:YUM)’s profit margin of 14.5% is respectable. The company has a latent risk with its significant debt load. Its total debt to equity ratio of 1.28 is far above McDonald’s.
Groceries
Wal-Mart Stores, Inc. (NYSE:WMT) is known for one thing; low prices. The company serves millions of lower income Americans who cannot afford to shop at higher-end establishments. Food is a necessity and Wal-Mart Stores, Inc. (NYSE:WMT) sold more than $240 billion of it in 2012. Combining these two facts makes Wal-Mart Stores, Inc. (NYSE:WMT) America’s most powerful low-cost grocery.
The low unemployment rate of skilled workers hurts the company. Many people prefer to shop at higher quality stores if possible. In the first qaurter of 2013 executives worked as hard as possible to distract investors from its 1.4% decline in comparable U.S. same store sales. Overall, The company is still profitable with a return on investment of 15.1% and a profit margin of 3.8%. Wal-Mart Stores, Inc. (NYSE:WMT) is a good play on American economic hardship, but short term improvements in the economy will challenge the firm.
Education
The unemployment rate for college educated workers is significantly less than that of less educated workers. Apollo Group Inc (NASDAQ:APOL) offers a number of for-profit education programs to help unemployed and under-employed workers. A combination of regulatory challenges and falling unemployment rates pose substantial challenges for the company.
The for-profit education sector depends on government handouts and more than 100% of Apollo Group Inc (NASDAQ:APOL)’s 2012 operating income came from Federal Aid Programs. The company faces tough competition from state funded community colleges with very good deals for local residents. Year-over-year the company’s 2013 second quarter and first quarter aggregate degree enrollment rate fell by 14.5%. If current trends continue, its 8.9% profit margin will only fall.
Conclusion
As the economy improves Apollo Group Inc (NASDAQ:APOL) is one company that ought to be avoided as it is dependent on fickle government handouts to keep its operations going. Wal-Mart Stores, Inc. (NYSE:WMT) is facing challenges in the U.S. as the economy improves, but its dominant position and world class infrastructure should allow it to maintain its power. Yum! Brands, Inc. (NYSE:YUM) and McDonald’s Corporation (NYSE:MCD) are facing difficulties as fewer people eat-down in fast food restaurants. Regardless, McDonald’s Corporation (NYSE:MCD) has fat 44.5% gross margins and is a dependable dividend payer.
The article The Downside of Falling Unemployment originally appeared on Fool.com and is written by Joshua Bondy.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends McDonald’s. The Motley Fool owns shares of McDonald’s. Joshua is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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