Stocks in the Consumer Staples sector carried out their
traditional defensive role as the broader equity markets came under
pressure over concerns about the prolonged weak US economy and the
debt crisis in Europe. But the group has been a laggard as momentum
returned to the market over the last three months. In 2011, the
sector index grew 10.5% versus a flat finish for the S&P 500
The group's defensive attributes stem from its ability to buck
sluggish economic growth as food, beverage, household products and
cosmetics companies that manufacture and market non-durable
consumables are considered essential to daily life, such as food,
drink, toothpaste, deodorants, toilet paper, etc. Although staples'
top-line is expected to continue the uptrend of the last few
quarters going forward, margins will remain under pressure due to
elevated food prices.
The macro-economic environment remains uncertain. However, we have
seen that product demand has remained relatively stable for
companies that are more exposed to fast-growing emerging markets in
comparison to the slow-growing developed markets. Moreover,
favorable foreign exchange translation and lower production costs
in developing markets resulted in higher operating margins than in
the US. Therefore, consumer staples companies have performed
decently despite the challenges in the US and Europe.
Beverage companies, such as
) are showing interest in the emerging markets of India, Russia and
China, as the developed markets are nearing saturation.
Coca-Cola has already invested over $2 billion in the last 18 years
in India and remains very optimistic about its Indian operations.
Further, Coca-Cola has seen a double-digit growth rate in India
aided by its top-brands, which includes Thumbs Up, Sprite and
Maaza. Over the next five years, Coca-Cola, along with its bottling
partners, will make a further investment of $2 billion to build
consumer marketing, infrastructure and brands in India.
PepsiCo had invested $500 million in India in 2008. In 2009,
PepsiCo poured in $200 million in India and also plans another $500
million investment over the next three years. PepsiCo expects
emerging markets like India, China, Russia and Brazil to drive its
growth in future.
As part of an ongoing push into emerging markets, Coca-Cola also
plans to invest $3 billion in Russia from 2012 to 2016. Coca-Cola
plans to invest $4 billion in China over three years starting in
2012, thus raising its total investment in China between 2009 and
2014 to $7 billion.
The largest packaged food maker,
Kraft Foods Inc.
), following its takeover of Britain-based chocolates and
confectionary company Cadbury Plc in 2010, expects to invest in the
biscuits, candy and gum categories in India. Kraft's brands like
Oreo cookies and Tang powdered drink mix have also created its own
space in India. Kraft is also aggressively investing in Brazil,
Russia, China and Indonesia.
H.J. Heinz Company
) also remains well positioned in the key emerging markets of
Russia, India, China and Indonesia. With the acquisition of Quero
brand from the Brazilian food manufacturer Coniexpress S.A.
Industrias Alimenticias in April 2011, Heinz expects its sales in
the Latin American market to double. In addition, Heinz expects
investments in emerging markets to generate more than 20% of its
total sales in fiscal 2012.
Tough Job Markets
Overall, the job environment remains tough, though there has been
some modest improvement lately in the sectors of beverages,
tobacco, food and hygiene items. Still, the unemployment scenario
is expected to remain relatively high in 2012. We thus believe that
the private label goods, which are comparatively cheaper than the
branded items, will attract consumers.
Rise in Raw Material Costs
Further, the substantial rise in raw material prices remains a drag
on margins of most of the companies in this sector.
Therefore, to survive in an environment of escalating prices, many
companies in the consumer staples sector have "right-sized"
portions and packages of their products to push higher prices to
consumers. PepsiCo had reduced the Lay's "Family Size" potato-chip
bag from 16 ounces to 14 ounces in 2009, due to rising prices of
raw materials, while Heinz has also reduced the portions of its
several products in the third quarter of 2012.
Companies have also been focusing on managing costs through cost
reduction initiatives. Coca-Cola is undertaking various
productivity initiatives to streamline its cost structure and boost
profitability. In 2011, the company successfully completed its
four-year productivity program, with annualized savings over $500
million, and has made plans to launch a new global productivity
initiative in 2012 that will target $350 to $400 million in
annualized savings by the end of 2015.
) is also raising its prices and carrying out cost reduction
initiatives to combat the input cost headwinds, but still expects
the commodity prices to rise in 2012.
AVON PRODS INC (
In spite of the price hike, these companies bring out new
innovative products to cater to the ever-changing demands of
customers. Unilever launched 10 new brands in its Home care segment
in 2011, including the Domestos Toilet System in the UK and
Sunlight hand dishwash in Indonesia and Vietnam. In the Hair
section, Unilever experienced success with Dove Damage Therapy, the
introduction of Suave Pro-Styling range, the re-launch of Clear and
the launch of TRESemmé in Brazil.
Heinz's Dip & Squeeze Ketchup, launched in September 2011, was
a breakthrough dual-function ketchup package for the foodservice
industry and it continues to expand across Continental Europe,
Mexico and Canada. From the first plastic ketchup bottle to
Top-Down and Fridge Door Fit, Heinz continues to lead the industry
in ketchup packaging innovation.
Likewise, the top global beauty and direct selling
) continues to revolutionize the beauty industry by launching
innovative, first-to-market products using Avon-patented
technology. The flagship Avon Color brand sells 4 tubes of lipcolor
every second. Its brands like Skin So Soft continue to evolve to
meet today's personal care needs.
) Save-A-Lot stores offer savings of up to 40% on groceries,
compared to traditional grocery stores. The company currently plans
to invest in 80 to 90 primary store remodels and increase its store
count by approximately 50 to 60 stores in 2012.
Wal-Mart Stores, Inc.
) has recently taken initiatives to open better and cleaner stores,
merchandising and provide a different shopping experience to its
customers. The stores feature enhanced service and improved layout
that is designed to make the shopping experience more convenient
Wal-Mart has also aligned the departments that are favorites of
customers. Most recently, Wal-Mart has opened such stores in
Chantilly, Covington and Crowley with the same concept, providing
job opportunities and savings.
Philip Morris International Inc.
) is well positioned to capitalize on its strong brand in emerging
economies, while enjoying the benefit of reduced liability risk in
developed countries, since its operations are globally diversified.
Philip Morris' earnings grew 13.4% year over year $1.10 per share
in the fourth quarter and increased 26.1% in fiscal 2011 to $4.88
per share. Excluding the currency headwind, the company projects
its adjusted earnings to increase by approximately 10% to 12%
versus $4.88 per share in 2011.
Its sales also increased 9.7% in the quarter, excluding the
favorable currency translation, mainly driven by favorable pricing
of $1.9 billion, primarily in Asia, and favorable volume of $472
However, the company was negatively impacted by the weakening euro,
mainly due to the sovereign debt issues in Europe and several
emerging market currencies which have depreciated against the US
dollar. In addition, there have been significant increases in
cigarette-related taxes which might impact the company's cigarette
volume and sales due to lower consumption levels, a shift in sales
from manufactured cigarettes to other tobacco products and a shift
from the premium price to the mid-price or low-price cigarettes.
In spite of the above difficulties, management continued to deliver
strong business results with substantial amounts of cash to enhance
shareholder value through share repurchases and dividends. During
the year, Philip Morris spent $5.4 billion to repurchase 80.5
million shares of its common stock, and spent $1.0 billion to
repurchase 14.5 million shares in the quarter. The company also
plans to buyback approximately $6.0 billion in fiscal 2012.
In addition, Philip Morris hiked its dividend by 20.3% to 77 cents
per share in 2011, representing an annualized rate of $3.08 per
common share. The company has been constantly increasing its
dividend after the company spun out from
Altria Group, Inc.
) in 2008. The previous three dividend increases were 17.4%, 7.4%
and 10.4% in 2008, 2009 and 2010, respectively.
The company had also completed the acquisition of a cigarette
business in Jordan, consisting primarily of cigarette manufacturing
assets and inventories, for $42 million in June 2011, while it
acquired a cigar business, consisting primarily of trademarks in
the Australian and New Zealand markets, for $20 million in January.
We thus give a Zacks #2 Rank which implies a short-term Buy rating
and provide a Neutral rating on the stock on a long term basis.
The global manufacturer and marketer of high-quality brand products
Sara Lee Corporation
) also registered decent second quarter 2012 earnings of 27 cents
per share, exceeding the Zacks Consensus Estimate by 8% and the
prior-year quarter by 29%. Strong yearly growth in the Coffee &
Tea business led to the rise in sales.
The company is also undertaking strategic disinvestments to cope
with higher expenses. During the quarter, Sara Lee closed the
divestiture of its North American foodservice coffee and shot
beverage business to
J.M. Smucker Company
). It is also planning to split itself into two businesses and
maintain the company's policy of streamlining the portfolios for a
strong and focused business.
Sara Lee however faces tremendous inflationary pressure and severe
competition from several branded and private label products.
However, the company is able to combat its rising commodity costs
by higher prices. Thus, Sara Lee holds a Zacks #2 Rank implying a
short-term Buy rating. On a long-term basis, we maintain a Neutral
rating on the stock.
The packaged and processed food-maker
) has generated strong revenue growth and increased its focus on
investment in brand building and stronger innovation. The company
has posted fourth-quarter 2011 earnings of 64 cents which exceeded
the prior-year earnings by 25%. Kellogg also expects its full-year
2012 guidance of currency-neutral earnings per share to grow 2% to
Though Kellogg's cost of commodities, energy and fuel peaked in the
quarter, which led to a decline in the operating profits by 0.7%,
the top-line jumped 5.4% to $3.02 billion in the quarter.
Recently, after winning the Pringles deal, Kellogg has become a
strong player in the savory salty snacks business, second only to
PepsiCo. The Pringles deal will shore up Kellogg's overseas
business and increase returns from its snacks by almost three
The buyout is expected to strengthen sales in Europe and mark a
forceful entry for the retail giant to Asia and Latin America.
Moreover, the Pringles buyout is likely to reduce Kellogg's
dependence on its mainstay cereal business apart from adding an
important brand to its already popular offerings of snacks like
Keebler and Cheez-It.
Analysts, however, have mixed opinions about the deal. While some
felt that Pringles will add to the already dominant position of
Kellogg in the snacks category, some are of the opinion that the
brand is not very useful as it had not been faring well in its
domestic market for quite some time. We thus hold a Zacks #3 Rank
implying a short-term Hold rating. On a long-term basis, we
maintain a Neutral rating on the stock.
Pressured by inflation and current economic headwinds,
Procter & Gamble Co.
) has not been able to please its investors lately because of
delivering a disappointing second quarter 2012, with net earnings
from continuing operations sliding 49.0% year over year to 57 cents
per share. The results were also 47.22% below the analyst
estimates. Profits were restricted on account of charges associated
with the Appliances and Salon Professional businesses.
Though its net sales increased 4% year over year to $22.1 billion
in the quarter, based on volumes which were fuelled by initiatives
and continued market expansions, the estimates marginally missed
the Zacks Consensus Estimate of $22.2 billion. Gross margins also
declined 210 basis points, due to higher commodity costs, and
operating margins slipped 160 basis points due to lower gross
margin and higher selling, general and administrative expenses
(SG&A) as a percentage of net sales.
In order to combat with the rising commodity prices, P&G has
decided to slash 1,600 jobs during the current fiscal year and
another 4,100 jobs during fiscal year ending in July 2013, to save
up to $10 billion of cost, including $1 billion in marketing costs
and $3 billion in overhead costs, by the end of the fiscal year
ending in June 2016.
In mid-Feb, P&G also shed off its Pringles potato chip business
by striking a $2.7 billion deal with Kellogg. The pending Pringles
deal also lowered its forecasts for the third-quarter 2012 net
earnings from continuing operations and core earnings to be in the
range of 89-95 cents per share compared to 91-97 cents per share,
P&G is still one of the largest consumer products makers, but
has been thrashed by uncertain economy and higher materials costs.
Moreover, the delay in the launch of its new Tide Pods detergent
caused losses because it could not match demand with its supplies.
In addition, it had to rescind price increases on items such as
Cascade dishwasher detergent after competitors decided not to raise
We therefore provide a Zacks #4 Rank to P&G, which implies a
short-term Sell rating. However, on a long-term basis, we remain
Neutral on the stock, as the company continuously expands its
portfolio of brands, both through internal development and
The world's leading manufacturers of health and hygiene products
) reported fourth quarter and fiscal year earnings of $1.28 and
$4.80 per share, which missed the Zacks Consensus Estimate of $1.29
and $4.82 per share, respectively. The adjusted earnings, though,
increased 7% from the prior-year fourth quarter 2010 earnings and
2.6% from fiscal year 2010.
Net sales also showed growth of 2.0% to $5.2 billion in the
quarter, while it increased 5.6% to $20.8 billion in the year.
However, Kimberly-Clark was negatively impacted by rising input
cost inflation, higher effective tax rate and lower net income from
equity companies in the quarter. Thus it expects sales to decrease
by 2% in 2012.
Gross profits and operating profits also contracted in the quarter,
as cost inflation more than offset efficiency initiatives.
Inflation in key cost inputs was approximately $55 million overall
in the fourth quarter 2011 versus 2010, which included increases of
$75 million for raw materials other than fiber, primarily polymer
resin and other oil-based materials, $15 million in distribution
costs and $5 million for energy, partially offset by $40 million of
lower fiber costs.
Kimberly-Clark's cash flow from operations declined in the quarter,
driven by increased working capital, along with higher defined
benefit pension plan contributions, partially offset by improved
cash earnings. Cash provided by operations in fiscal 2011 was also
lower than 2010 at $2.29 billion, driven by higher pension
contributions in 2011.
Nevertheless, Kimberly-Clark directed its cash flows toward
increasing dividends by 6% to 74 cents per share. Our outlook
remains Neutral, we currently have a Zacks #4 Rank on the stock,
which implies a short-term Sell rating.
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PEPSICO INC (PEP): Free Stock Analysis Report
PROCTER & GAMBL (PG): Free Stock Analysis
PHILIP MORRIS (PM): Free Stock Analysis Report
SMUCKER JM (SJM): Free Stock Analysis Report
SARA LEE (SLE): Free Stock Analysis Report
SUPERVALU INC (SVU): Free Stock Analysis Report
UNILEVER PLC (UL): Free Stock Analysis Report
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