4 Stocks to Watch in a Challenging Consumer Products-Discretionary Industry
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 consumers’ 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 Traeger, Inc. COOK, The Honest Company, Inc. HNST, Genius Brands International, Inc. GNUS 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 sell 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 rising prices have been discomforting family budgets. The consumer price index rose to 6.5% in December 2022 on a year-over-year basis, albeit at a slower rate when compared with November. 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. Demand at furniture and home furnishings stores as well as electronics and appliance stores was soft this holiday season, with sales down 1.1% and 5.7%, respectively, per the National Retail Federation.
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 #224, which places it in the bottom 11% 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 3 cents a share from earnings of 14 cents at the beginning of May 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 outperformed the broader Zacks Consumer Discretionary sector but underperformed the Zacks S&P 500 composite over the past year.
The industry has declined 16.9% over this period compared with the S&P 500’s decline of 10%. Meanwhile, the broader sector has slumped 19%.
One-Year Price Performance
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 1.86X compared with the S&P 500’s 3.30X and the sector’s 1.44X.
Over the last three years, the industry has traded as high as 9.88X and as low as 0.67X, with the median being at 3.82X, as the chart below shows.
Price-to-Sales Ratio (Past 3 Years)
4 Stocks to Watch
The Honest Company: This Los Angeles-based company has been gaining market share from increased household penetration, brand awareness and product accessibility to more consumers. Despite a tough environment, the company is benefiting from strong demand for its clean and natural products.
The Honest Company manufactures and sells diapers and wipes, skin and personal care, as well as household and wellness products. 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 54.3% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: HNST
Traeger: This creator and category leader of wood pellet grills has been benefiting from proactive measures undertaken to drive profitability and financial flexibility amid tough macroeconomic conditions. These include cost containment initiatives as well as inventory rationalization.
Traeger has a trailing four-quarter earnings surprise of 79.7%, 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 #3 (Hold) company have declined 68.3% in the past year.
Price and Consensus: COOK
Genius Brands: This global brand management company that creates, produces, broadcasts, and licenses entertainment content for children is witnessing higher revenues. The addition of new content, markets and distribution partners to its portfolio is supporting top-line growth. Strategic buyouts and investments have aided Genius Brands in strengthening its position in the children's entertainment industry.
The company attained significant revenue growth in third-quarter 2022, thanks to synergies and efficiencies from the acquisitions of WOW Unlimited Media Inc., Ameba channel, and investment in Germany-based children’s media giant, YFE. The Zacks Consensus Estimate for Genius Brands’ current financial-year revenues suggests growth of 738.9% from the year-ago reported figure. Shares of this Zacks Rank #3 company have lost 17.4% in the past year.
Price and Consensus: GNUS
The RealReal: This San Francisco-based company is the world’s largest online marketplace for authenticated, resale luxury goods. The RealReal is focusing on enhancing profitability through price optimization, cost containment, tapping of potential revenue streams and overhauling of consignor commission structure.
The RealReal has a trailing four-quarter earnings surprise of 2.3%, on average. It has an estimated long-term earnings growth rate of 33.8%. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 26.5% and 14.4%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 company have decreased 83.3% in the past year.
Price and Consensus: REAL
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Traeger, Inc. (COOK) : Free Stock Analysis Report
Genius Brands International, Inc. (GNUS) : Free Stock Analysis Report
The RealReal, Inc. (REAL) : Free Stock Analysis Report
The Honest Company, Inc. (HNST) : Free Stock Analysis Report
To read this article on Zacks.com click here.