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Msg  4846 of 4960  at  4/18/2022 11:22:37 AM  by


The following message was updated on 4/18/2022 11:22:53 AM.

Consumers Are Sticking With Brand Labels Over Cheaper Options. That's Good News for Kellogg and General Mills.


Consumers Are Sticking With Brand Labels Over Cheaper Options. That's Good News for Kellogg and General Mills.


Consumer staples stocks have outperformed as investors seek out defensive names, spurred by factors including record inflation and Russia's war in Ukraine. Yet that conflict has caused already high commodity prices to spike, leading to worries that U.S. consumers are reaching a breaking point, and will eschew brand names for cheaper private label offerings.

Still, the reckoning for staples stocks may not be as imminent as bears fear.

First the bad news: Although wages have risen, they haven't kept pace with cost of living increases, as evidenced by recent readings on key metrics. Last week, data showed that consumer prices soared for a seventh straight month to an 8.5% annual pace in March, extending a run of 40-year highs, while producer prices jumped 11.2%—the largest increase on record since data collection began in 2010. That's left many investors bracing for higher inflation for longer .

Moreover, the strain of higher prices is starting to show: Readings from Nielsen covering the four weeks ended in late March revealed that private label products outperformed brands for the first time after six consecutive months of underperformance, notching year-over-year sales growth of 7%.

Then there's the fact that interest rates are rising—making high dividend payers, like staples, less attractive, given that they have to compete with increasing yields on lower-risk bonds.

So far however, that hasn't put a dent in the stocks: The Consumer Staples Select Sector SPDR exchange-traded fund (XLP) has risen more than 7% in the past month, and is up 2.3% year to date, two periods when the S&P 500 is in the red.

That trend looks like it has legs, for a few reasons. First of all, private label hasn't taken a meaningful amount of share yet—the Nielsen data showed that brands still saw a 4% sales gain in the most recent period. Consumers' high savings rates won't last forever, but they have helped cushion the blow. That means bigger-ticket items may feel the pinch before smaller essentials, especially as brand loyalty increased for many companies during the pandemic, when we were all home snacking . And the most recent reading on retail sales showed that consumers haven't pulled back meaningfully despite the spike in gasoline prices.

That's allowed consumer products makers to raise prices nearly in lockstep, passing on higher costs to the consumer without hurting demand much. The fact that this has held true across the industry has held off worries of margin-eroding price wars.

"Companies are acting the same way and everyone's making similar decisions" on pricing, says Stephens analyst Ben Bienvenu. "It's when someone swims in the other direction that's things get messy."

It's also left consumers without a lot of options. If prices on both private and branded products have gone up, they may choose to stick with the latter, if the former doesn't offer substantial savings.

"You're going to eat your cereal one way or another, and you can't shift from cereal to eggs because the price of eggs is up a lot too," says Matt Dmytryszyn, chief investment officer at financial advisory firm Telemus. In addition, spiking prices for things like produce and meats could push more consumers back toward packaged food. "This will benefit a broad swath of consumer packaged goods companies, not just private label," he says.

Worries about a recession may be overblown near-term, but investors and consumers have gotten more skittish about the possibility. So it's worth noting that historically, bigger brands have done fairly well during times of economic difficulty, thanks to advantages of scale in operations, the ability to command more shelf space at retailers, and stronger balance sheets to withstand price cuts, if they become necessary.

Yet consumer brands also look particularly well placed at the present, as the pandemic helped to reverse longer-term trends that had favored private label, says Burns McKinney, managing director and a senior portfolio manager at NFJ Investment Group.

"As more consumers are shopping online, private label has lost out to national brands since the start of Covid," McKinney says. "Over much of the past decade, smaller, disrupter companies had been making gains, especially among millennial buyers; the shift toward digital shopping has made name recognition more crucial and led to a rebound in brand loyalty."

He also notes that inflation can make dividend paying stocks more attractive as a whole, given that they're returning cash to shareholders today, compared with higher growth sectors like tech, where profits and cash flows expected in the future look less valuable in an inflationary environment.

Analysts expect a number of consumer staples stocks will see rather modest earnings per share gains this year, after pandemic-boosted gains in 2020 and 2021.

Yet it's worth noting that companies including Kraft Heinz (KHC), Campbell Soup (CPB), Kellogg (K), General Mills (GIS), Philip Morris International (PM), J.M. Smucker (SJM), and Molson Coors Beverage (TAP) are all expected to see EPS hold up relatively well, while still paying a dividend and trading at 18 times forward earnings or less.

That said, private label does seem poised to regain some ground in an environment where consumers are focused on value—a phenomenon that Barron's has noted should help discounters like Dollar General (DG) and Walmart (WMT). But the industry's fragmentation means there aren't a lot of pure-play options for investors.

Treehouse Foods (THS) is one option—recent underperformance related to operational missteps means the stock trades for just over 20 times forward earnings, not much above its historical average, even as analysts expect EPS will jump nearly 90% year over year next year. It could also benefit from changes stemming from activist investor involvement .

All of that is to say that investors in consumer stocks may be able to have their cake—and their cereal, ketchup, and cookies—and eat it too.


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