Understanding Recent Poor Performance of Consumer Goods Sector
Zain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The last earnings season brought with it several themes for the investors in the consumer goods sector.
The choppy consumer environment in developed markets was clearly an issue over the past three months. However, very few companies (I am talking about cosmetics, household and personal care (CHPC) companies) outright blamed external factors for organic sales growth shortfalls. Let’s have a look at how different companies communicated their challenges in this space.
What did they talk about?
The macro environment was not a key piece of the dialog during last quarter’s earnings, i.e.in the First Quarter (1Q) of 2013. This came as a surprise as, in the recent past, almost every company mentioned, to varying degrees, that the macro environment presented an unanticipated headwind. We had heard from CHPC companies at CAGNY (Consumer Analyst Group of New York) in February that the consumer environment in developed markets remained “choppy” and was likely to be so for the foreseeable future.
In aggregate, organic sales were in-line with the expectations and marked a sequential deceleration from 4Q. Tough comps were considered as the main driver of slower growth. Though, weather could be considered an issue (cold/wet winter vs. early spring), it certainly was not one the Street anticipated. Similarly, softer category growth and retailer inventory management were also unanticipated.
Weather one of the surprise factors
Though Newell Rubbermaid (NYSE: NWL), Jarden and Clorox (NYSE: CLX) spoke to weather being a challenge (both this year and lapping an unusually warm start to spring), only Clorox blamed this dynamic for its organic growth shortfall.
Specifically, Clorox' Kingford Charcoal brand (~10% of total company sales) declined ~20% in the month of March alone which, combined with a tougher comp led to a ~1.5% pt headwind to total company growth.
For Newell, a warmer spring bolstered Tools sales in the prior year, though as CEO Mike Polk stated, “you can't do anything about it, so you have to overcome it” and did as Tools delivered +5.1% growth.
Similarly, Jarden also had a tough weather comp and faced a ~$10 million headwind this year from a slower/later start to baseball season, but still was able to grow +4% organically as other pieces of the portfolio picked up the slack. Lastly, though Estee Lauder did not specifically call out weather as a challenge this quarter, we can’t help but think there was some degree of weather induced slowness in U.S. department store sales as corroborated by overall retail & restaurant trends and prestige beauty industry data.
What the leader had to say
With Procter & Gamble (NYSE: PG) being the first and largest company to report this earnings season and discuss a slowdown in category growth in developed markets, the Street is concerned about whether or not this would prove to be an issue for the entire group as historically, P&G has been prescient of macro trends (recall two years ago at CAGNY P&G discussed higher commodity costs before others). Importantly, though P&G didn't emphasize weaker category growth as the root cause of its revenue performance, as earnings season played out, we did hear others corroborate P&G’s view on the external environment.
Soft category growth
Clorox’s CEO Don Knauss mentioned that the U.S. categories in which the company competes declined -0.2% in the first quarter of 2013 compared to ~1.5-2.0% growth over the past year and a half, with January being dramatically stronger than February and March.
Clorox took the view that issues impacting consumer confidence/behavior will prove temporary (reaction to payroll tax and late Spring). While category growth clearly decelerated in the quarter, looking ahead to the next 6-12 months, the company believes industry volumes should stabilize as pricing wanes. Importantly, Clorox’s volumes did not decline to the same degree they did in fiscal 2009, which is the most recent prior period of pricing and inflation. Despite a slowdown in category growth, none of the companies discussed stepping up promotional activity to stimulate volumes; rather, the overwhelming majority spoke to innovation-driven growth.
A glimpse of the companies
As already mentioned, Clorox’s management blamed the weather for their earnings miss. Given this quarter’s top-line and EPS miss, it was surprising to see Clorox shares down only -1.4% on earnings day (vs. S&P -0.9%), particularly as organic revenues fell short in each reported division. Clorox’s revenue trends are often predicated on comparables, with one year’s positives becoming the next year’s negatives. Such was the case again this quarter as the combination of strong base period sales of Charcoal (in 1Q12 due to warmer weather and early merchandising by a large retailer) and a colder 1Q13 (a -20% decline in Charcoal volume in the month of March alone) led to a -1.5 pt drag on total company volumes (ultimately creating an easier comp in 1Q14).
In any event, with Clorox shares now trading at 19.3x the 2013 EPS estimate of $4.41, in line with its Large-Cap Household & Personal Care peers, despite below-peer earnings growth, it seems difficult to see much appreciation from here.
Newell is rated as a buy
With better-than-expected organic growth in two of the company’s three “Win Bigger” businesses and the management reaffirming guidance for 2013 despite dilution from non-core disposals, Newell Rubbermaid is already demonstrating the viability of its Global Growth Game Plan. Specifically, early investments in the segments & geographies that matter most are accelerating growth while flexibility from Project Renewal savings provides a cushion to the bottom line. It is this increased visibility on the bottom line, coupled with the revenue potential embedded in the company’s long-term strategy that keeps the Street bullish on Newell.
P&G disappointed its investors
With disappointing organic sales growth despite an improvement in market share momentum, we can understand why PG shares underperformed the market yesterday. To be sure, with Staples valuations having reached near historic levels over the past couple of months, the bigger question will be whether or not P&G’s commentary on the more challenging macro environment is the beginning of a trend or a one-off event. Either way, we would expect PG shares to take a breather until the company is able to show a marked acceleration in top-line growth.
Among several other themes, an unfavorable weather proved to be a reason for many companies to justify their earnings and revenue misses. However, it was interesting to note that hardly any company blamed a sluggish macro environment as the reason for poor results, something that the analysts hadn’t expected. On an overall note, there are still some companies like Newell in this space that despite unfavorable macro conditions are poised to grow given their secular growth themes.
Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!