Product cost inflation, tight labor market and supply chain issues are some of the headwinds that players in the Zacks Consumer Products-Discretionary industry have been encountering lately. Also, soaring prices are squeezing consumer’s disposable income and dampening demand for discretionary categories. With the desperate need to tame inflation, the Federal Reserve is raising the benchmark interest rate. But a higher interest rate environment is not good news for consumer-centric industries, especially the consumer discretionary sector.
To navigate troubled waters, industry participants have been directing resources toward digital platforms and augmenting the supply chain. Companies have been focusing on a superior product strategy, advancement of omni-channel capabilities and prudent capital investments. Backed by these initiatives, companies like Prestige Consumer Healthcare Inc. PBH, Central Garden & Pet Company CENT, Traeger, Inc. COOK and The RealReal, Inc. REAL are set to cash in on the opportunities.
About the Industry
The Consumer Products-Discretionary industry has a direct correlation with the economy, thus making it cyclical. The discretionary products generally command high prices, with middle-to-higher income group people being the targeted customers. The industry comprises companies that offer product categories, including fashion, jewelry, and watches, and other home and art products. Quite a few players develop, manufacture, market and sell over-the-counter health and personal care products. Some even manufacture and distribute party goods. There are companies that design, source and distribute licensed pop culture products too. Some industry participants also produce and distribute various products for the lawn and garden, and pet supplies markets. Companies sells products to specialty retailers, mass-market retailers and e-commerce sites.
3 Key Trends to Watch in the Industry
Soft Demand May Hit Revenues: Elevating prices and geopolitical concerns continue to pose a threat to consumer spending activity. Undoubtedly, the industry’s prospects are correlated with the purchasing power of consumers. But higher gasoline and food prices have been discomforting the family budgets. The consumer price index rose to 8.2% in September 2022 on a year-over-year basis. The Fed’s aggressive rate hikes to tame inflation are making things tough for consumers by squeezing disposable income. Consequently, demand for discretionary products has softened, resulting in an inventory pile-up.
Margins an Area to Watch: The industry is quite fragmented, with companies vying for a bigger slice of the pie on attributes such as price, products and speed-to-market. In a bid to address these, a significant number of players in the industry have been investing in strengthening their digital ecosystem. While these endeavors provide an edge, they entail high costs. Apart from these, higher marketing, advertising, and other operational expenses might compress margins. Of late, the industry participants have been dealing with product cost inflation, a tight labor market and supply-chain issues. Nonetheless, companies have been focusing on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks as well as adopting effective pricing policies.
Brand Enhancement, Capital Discipline: Industry participants have been focusing on deepening engagements with consumers, creating innovative and compelling products, and enhancing digital and data analytics capabilities. The launch of newer styles, customization options, unique packaging, point-of-sale displays, automation, and high-end customer service enable them to woo consumers. Efforts to enhance brand portfolio via marketing strategies, buyouts, innovations, and alliances are likely to keep supporting players in the space. The companies have been taking steps to strengthen their financial position. In fact, they have been making every move, from managing inventory to optimizing capital expenditures and enhancing operational efficiency.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Consumer Products-Discretionary industry is a group within the broader Consumer Discretionary sector. The industry currently carries a Zacks Industry Rank #200, which places it in the bottom 20% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates drab near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. The industry’s bottom-line estimate has declined to a loss of 10 cents a share from earnings of 9 cents at the beginning of April 2022.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Versus Broader Market
The Zacks Consumer Products-Discretionary industry has almost performed in line with the broader Zacks Consumer Discretionary sector but underperformed the Zacks S&P 500 composite over the past year.
The industry has declined 43% over this period compared with the S&P 500’s decline of 21.5%. Meanwhile, the broader sector has slumped 43.8%.
Industry’s Current Valuation
On the basis of forward 12-month price-to-sales (P/S), which is commonly used for valuing consumer discretionary stocks, the industry is currently trading at 3.56X compared with the S&P 500’s 3.24X and the sector’s 1.39X.
Over the last three years, the industry has traded as high as 9.41X and as low as 0.59X, with the median being at 3.58X, as the chart below shows.
4 Stocks to Watch
Traeger: This creator and category leader of the wood pellet grill has been benefiting from the proactive measures undertaken to drive profitability and financial flexibility amid tough macroeconomic conditions. These include a cost containment initiative that is expected to generate annualized savings of $20 million.
Traeger has a trailing four-quarter earnings surprise of 88.1%, on average. The Zacks Consensus Estimate for the bottom line for the current fiscal has been stable over the past 30 days. Shares of this Zacks Rank #2 (Buy) company have declined 81.2% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Prestige Consumer Healthcare: This leading consumer healthcare products company’s proven business strategy and a strong portfolio of brands have been contributing to the top line. Apart from this, the company is gaining on e-commerce strength and focusing on areas with high growth potential. Management anticipates organic revenue growth in the range of 2-3% in fiscal 2023.
Impressively, Prestige Consumer Healthcare has an estimated long-term earnings growth rate of 8%. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 3.4% and 3.5%, respectively, from the year-ago reported figure. We note that shares of this Zacks Rank #3 (Hold) company have decreased 11.8% in the past year.
Central Garden & Pet Company: This producer and distributor of various products for the lawn and garden, and pet supplies market has been developing new products, advancing digital capabilities, focusing on marketing activities and making strategic buyouts to firm its position. It is also on track with the Central to Home strategy.
Central Garden & Pet Company has a trailing four-quarter earnings surprise of 398.9%, on average. The Zacks Consensus Estimate for current financial-year revenues suggests growth of 1.6% from the year-ago reported figure. Shares of this Zacks Rank #3 company have fallen 25.6% in the past year.
The RealReal: The world’s largest online marketplace for authenticated, resale luxury goods has been witnessing stellar demand in women’s apparel, shoes and handbags. To navigate the challenging operating environment, The RealReal has been actively managing costs and cash flows. This includes lowering discretionary spending and slowing hiring for open support roles.
The RealReal has a trailing four-quarter earnings surprise of 3.9%, on average. It has an estimated long-term earnings growth rate of 28.1%. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 33% and 17.6%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 company have decreased 89.9% in the past year.
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Prestige Consumer Healthcare Inc. (PBH) : Free Stock Analysis Report
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Zacks Investment Research
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