May 8, 2023

 

Stratably reviews a sampling of consumer brands each quarter to understand how demand is trending, what management teams are most focused on, what we can expect moving forward, and any counter-intuitive findings.

 

Over the last two weeks we reviewed results from 13 companies including P&G, Coca-Cola, Kimberly-Clark, 3M, Pepsi, Newell, Colgate-Palmolive, Hasbro, Crocs, Columbia Sportswear, Church & Dwight, Mondelez, and Clorox.

 

We’ll cover 1Q performance and outlook in today’s post, thoughts on media spend on Tuesday, and provide snapshots of management expectations for inflation on Thursday.

Key Takeaways

  • CPG performance was better than expected mostly via price and better than normal elasticities
  • Consumer discretionary is mixed – retailers remain cautious, consumer demand stable, but weak
  • Management teams across categories have conservative outlooks for the balance of 2023

Consumer staples outperform

Across our sample, consumer staples companies tended to beat both top-line and bottom-line expectations.

 

Several of these companies grew revenue by high single digits and even double digits, buoyed mostly by price. Volume, in the case of companies like Mondelez and Coca-Cola, also grew, although CPG companies were much more likely to be experiencing volume declines in the low single digits. The latter of which has been a continuation of trend over the last several quarters.

 

Management teams across CPG continue to highlight better than normal elasticities, although consumers are altering their behaviors. Clorox management summed it up nicely: “(consumers are) letting a trash bag fill longer. They're stretching their time in between cleanings. They're doing those things to make their wallet stretch...”

 

A common theme echoed by several management teams is a hallowing out in the middle of categories during this inflationary period. In other words, premium products are doing well as are budget-focused selection, leading to products in the middle losing share.

 

The strength in these categories bodes well for Walmart’s physical and digital results considering their exposure to grocery, and particularly, online pick-up. It may also provide enough room for additional price increases, although most CPG organizations indicated they did not plan on doing so.

Discretionary categories mixed

It is more difficult to draw themes across consumer discretionary other than to say its mixed.

 

For instance, on the footwear and apparel side, Crocs delivered tremendous results leading it to raise its outlook, while Columbia Sportswear reduced its EPS range for the year.

 

The divergence often comes down to business-specific inventory trends that are taking longer than expected to work through for companies that went from complete lack of stock to overstock between 2021-2022. Management teams suggested retailers are getting closer to normalized inventory levels but in many cases, several more quarters are needed to fully normalize.

 

Management teams in these categories pointed to poor weather in March and April, general caution on the part of retailers (manifesting itself in later orders for back to school in the case of Newell and conservative 2H23 orders in the case of Columbia), and a weak impact from tax returns as important factors impacting their results.

 

Companies also expressed that the consumer is responding well to value, a theme echoed by retailers as well. This may set up Amazon to have a blockbuster Prime Day this summer.

Many raised guidance, but only in conjunction to 1Q outperformance

Consumer staples companies tended to raise their guidance, although in many cases it simply corresponded to the outperformance in 1Q.

 

Investors pressed management teams on if they are being too conservative and should be raising guidance higher. However, companies expressed caution on the back half of the year, very much similar to the last several quarters where the consumer reaction to persistent (albeit decelerating) inflation is difficult to predict.

 

Outlooks from consumer discretionary categories were more mixed, again mostly tied to business specific issues. As a whole, it appears retailers are expected to continue to exercise cautious buys in discretionary categories, the normalization of inventory will take more time, comps tend to get easier as we progress through the year, but management teams are erring on the side of caution.

 

Crocs’ management summed it up well: “We do anticipate consumer softening as the year goes on. I think we saw a little bit of softening as quarter one went along. And so, we're not necessarily baking the same performance we had in Q1 into the rest of our year. I think that's only prudent.”