This was not the best of years for consumer staples stocks.
By May, the sector – which is generally considered a refuge during times of volatility - had become the worst performer amongst all S&P 500 sectors.
Big names in the sector had tumbled or taken a significant hit by the middle of this year. For example, the Procter & Gamble Company (PG) had shed 22% of its price from the start of this year. It has recovered since but it is still down by approximately 3% since January. Tobacco maker Philip Morris International Inc.(PM) has been on an unstoppable slide since the beginning of this year and is down by 61.3%, as of this writing.
Several factors have led to investors withdrawing funds from the sector. A rise in oil prices have translated to an increase in logistics costs but companies in the sector are hesitant to pass on these costs to consumers. Inflation rose. The Fed’s action of hiking interest rates during the latter half of this year resulted in a tightening of consumers purse strings. Trump’s trade war has also weighed on consumer staples, as company exports to countries that are part of the disputes could be affected.
Analysts are split on the sector’s future performance. In a June note, Credit Suisse predicted that the pain would continue for the next two years for consumer staples stocks. But Chad Morganlander from Washington Crossing Advisors said this was a time to buy. He predicted a rise in fortunes for consumer staples stocks by the end of this year. The S&P 500 Consumer Staples sector is down by 14.3% as of this writing.
There are still winners to be found in the sector, however. Here are five consumer staples stocks that have managed to outperform the rest this year. This list only includes companies with market caps of $1 billion or greater and are listed on S&P 500.
1. McCormick & Company (MKC)
Market Capitalization: $18 billion
Price Increase: 52%
2. Lamb Weston Holdings Inc. (LW)
Market Capitalization: $10.7 billion
Price Increase: 35.3%
3. Church & Dwight Co. (CHD)
Market Capitalization: $15.8 billion
Price Increase: 35.2%
4. Hormel Foods Corporation (HRL)
Market Capitalization: $22.3 billion
Price Increase: 24.1%
5. Costco (COST)
Market Capitalization: $86.5 billion
Price Increase: 22.4%
McCormick & Company
Headquartered in Baltimore, McCormick & Co. is a 130-year-old company that sells spices and seasoning mixes to consumers and industrial clients. The company reported a double-digit increase in sales and shot past analysts estimates for its earnings during all three quarters of 2018. To expand its portfolio of offerings, McCormick acquired RB Foods from Reckitt Benckiser for $4.2 billion. The acquisition was widely panned by investors, who sent McCormick’s stock down by 6%, the day it was announced in 2017. This year, the company’s CEO attributed growth in revenues to growing sales of Frank’s Red Hot sauce and French’s Mustard – two products from the RB Foods brand.
A changing and adventurous consumer palette has also benefited McCormick’s sales. Experimentation with spices and flavors is the order of the day and that is proving to be a tailwind for McCormick’s sales. During an analyst conference, McCormick’s CEO said consumer demand for flavors was endless.
“Take the whole perimeter of the store and it’s our products and our categories that make that perimeter taste good. There is a tailwind for us, for most of the center of the store there is a headwind,” he said.
McCormick is also bolstering its presence outside the United States. China has become an increasingly important market for the company and it opened an online storefront on Tmall – one of China’s biggest ecommerce sites. It is also reported to have invested $150 million in India and is introducing Western products, such as hot sauces and mustard, to consumers there.
Lamb Weston Holdings
Lamb Weston Holdings is the world’s biggest producer of potato-related products, such as French Fries. It was spun out of Conagra Brands Inc. (CAG) in 2016. The company reported strong sales and earnings numbers during all three quarters this year. Limited Time Offerings or LTOs played a significant role in bumping up those numbers in its international markets. During LTOs, Lamb Weston produces special products that are available at special prices for a limited time frame only. According to Robb McNutt, the company’s CFO, limited time offerings accounted for more than half of global volume sales growth.
Lamb Weston also paid out dividends worth nearly $28 million last quarter and has commenced on a share repurchase program to buy back shares worth $250 million this year. Last week, Lamb Weston announced acquisition of Australian company Marvel Packers, a move which is expected to boost its global production capacity by 50 million lbs.
Moving onto 2019, Lamb Weston expects a difficult year for potato crops in Europe due to drought-like conditions this year. As a result, potato futures are trending higher and the company expects higher prices for its raw materials. Lamb Weston CEO Tom Werner said product prices will “sharply increase” during the second half of fiscal 2019 and first half of fiscal 2020. But it will not affect the company’s financial targets, he said.
Church & Dwight Co.
Church & Dwight Co. is a New Jersey-headquartered maker of household and consumer products. It has a broad array of products under its umbrella, from baking soda to condoms to cleaning agents. Even as the company continues to profit from its existing line of products, two new existing drivers have emerged in recent times to boost its bottom line. The first one is sales of organic products. During its latest quarter, Church & Dwight reported an increase of 4.7% in its overall sales of organic products. Nine product categories from the company’s portfolio of organic products have grown for, at least, four consecutive quarters.
International markets are another driver for Church & Dwight’s profits. CHD reported impressive growth numbers in international markets during three quarters of reporting in 2018. For example, the company reported a 21.1% increase in sales volume during the second quarter and a 26.3% increase during the third quarter. Matthew Farrell, the company’s CEO, referred to international markets are “a bright spot” for the company and noted Canada and Mexico as strong places for business.
Hormel Foods Corporation
Hormel Foods Corporation is a 127-year-old company that owns some of the most well-known brands, such as SPAM, in America. It has a consistent track record of growth and dividend payouts to investors.
However, it missed analyst targets for its revenue in the last year as well as the previous quarter. During Q4 2018, the Minnesota-based company reported that its overall volumes fell by 1% and sales for its grocery products declined by 4%. Higher commodity prices and lower harvest volumes for certain products, such as hogs, have contributed to declines in its overall sales volume. Hormel’s bottom line may also have been impacted by its acquisition of Columbus Craft Meats, the largest in its history. A bright spot in its earnings last quarter was an increase in international sales volume by 7%.
Currently Hormel Foods is in the middle of restructuring its business. As part of that effort, it has instituted a supply chain savings program and plans to invest $150 million to add 210,000 square feet to a production facility in Nevada, Iowa.
Costco is a retail pioneer that operates a chain of membership warehouses which offer significant product discounts to customers. It reported solid sales figures throughout all four quarters this year and had annual revenue of $138.4 billion, an increase of 9.7% from the previous year. (The latter figure is even more impressive when you consider that this year had one less week than the previous one). While it slowed last year, the membership rate for Costco’s stores increase remained fairly constant at around 4.5% this year. E-commerce, which has been cited as a threat to its largely physical stores business, accounted for approximately 4% of overall annual sales at the store.
Costco’s positive earnings beat does not mean that it is not facing headwinds. The Washington-based company’s stock crashed by 24% in December after an earning miss for the first-quarter of 2019. The more worrying aspect of its business is the decline in gross margins. Customers visit Costco for its attractive bulk deals that, in turn, boost its profits. However, those margins have declined in recent times as Costco is beset by the same economic headwinds plaguing the rest of the consumer staples sector. From a peak of 13.48% in May 2017, Costco’s margins fell to 12.68% last month. During the first quarter of 2019, the company reported gross margins of 10.75%, a decline of 50 basis points from the year earlier. Costco’s CEO Richard Galanti attributed the decline to competitive pressure.