Consumer staples stocks are currently at high valuations, analysts say, as investors have been moving toward the space in search of stability, higher quality, yield and shareholder returns in a time of uncertainty. These companies have been perceived by investors as safer and more stable relative to other types of stocks recently, analysts say. Some analysts even go as far as saying investors view these companies almost as a proxy for bonds.
Growth prospects for the space as a whole have remained fairly tepid, analyst say, adding that growth in emerging and developing markets has slowed over the last several quarters. Even though stocks for staples retailing have been performing well recently, analysts say the business and revenue growth performance could be described as subdued at best. The outlook doesn’t seem good, according to these analysts, particularly where there is deflation working in to the system and growing competition. Barriers to entry, particularly in food, are coming down, and there are many new companies in food that have been growing large. Analysts say there has been much competition in staples that has eroded shareholder returns in some cases, especially in retail grocery.
Some analysts also say there are too many stores being built relative to the slow population growth in the United States, which is down about 70 basis points. Demand seems fairly slack as well, partially attributable to demographics, with analysts saying Generation X didn’t have as many children as previous generations. Analysts identify one trend, however, that is growing and which they are the most bullish on: health and wellness. Consumers have been moving toward healthier products, as opposed to what they considered to be more diet-focused. There’s continued growth in natural and organics, as well as fresher offerings. Some food manufacturers are having a difficult time giving customers minimally processed food because they are by nature food processors, but there are a few that have distinguished themselves and benefited from this trend. These companies have opportunities with cost cutting in the short term, but in the long term they’ll have to focus more on the wellness trend, analysts say. The food industry is also consolidating, as one large company expanding has translated into the competition looking to grow as well. Baby Boomers are looking for ways to stay healthy as they age, and Millennials are also adopting healthier lifestyles. This trend is not only in specialty stores, but also in conventional traditional grocers.
Analysts are looking for a company’s ability to outprice in excess of inflation, as well as a firm’s relationship with retail and the resources a firm has toward supporting these intangible assets, which becomes more difficult as consumers are more particular about where they spend their money, and some of the older brands are seeing new consumers not having as much of an emotional attachment to them, especially in products such as laundry detergent. Instead, analysts say, consumers are focusing on health, wellness and the environment. One of the pockets of brand loyalty, however, seems to be cosmetics.
Retail companies are engaging in e-commerce on an increasing fashion, and although most of this internet retail is currently happening on desktops, analysts say the growth in mobile is more than 50%. Although e-commerce and mobile advertising are new phenomenons, analysts devote much of their time to this mode of retail. They say retailers focused on brick-and-mortar stores are having a difficult time competing with web-only services, and Amazon has emerged as one of the key players in the space. Online retailers, however, still have some types of merchandise they haven’t successfully marketed yet, with groceries emerging as one of the most clear examples.
Full report available here.
Interview Highlights: Erin Lash of Morningstar on Consumer Staples & Retail
September 01, 2016
Interview Highlights: Joe Edelstein of Stephens Inc. on Consumer Staples & Retail
September 06, 2016
Interview Highlights: Alexia Howard of Sanford C. Bernstein & Co. on Consumer Staples & Retail
September 06, 2016
Interview Highlights: Ali Dibadj of Sanford C. Bernstein & Co. on Consumer Staples & Retail
September 07, 2016
Interview Highlights: Scott Devitt of Stifel, Nicolaus & Co. on Consumer Staples & Retail
September 08, 2016
