Staples: Cry Babies. It’s not often you hear executives admit not knowing why their products aren’t selling well, but that’s what P&G’s CFO Jon Moeller did in the company’s earnings conference call last week. P&G reported 1% y/y increase in organic sales for its fiscal Q1-2018, down from 3% growth a year ago. When asked what was driving US sales deceleration, Moeller said, “We’ve been unable to put our finger on [it].” No change in consumption levels has been noticed, no move to private labels. Intrigued, I asked Jackie to investigate. Here’s what she discovered:
(1) Blaming babies. P&G is not the only consumer products company having a tough time. At Kimberly-Clark, a 1% y/y increase in Q3 sales volume was offset by a 1% decline in net price, leaving organic sales flat y/y. At Kimberly-Clark, however, executives blamed the babies—or rather the lack thereof. The US birthrate was down about 3% y/y in Q1, and South Korea’s birthrate was down 7%-9% ytd. The decline in the birthrate is expected to be an ongoing problem. “Those babies aren’t born this year, and they won’t be in the category next year or the year after that. So category weakness is certainly there in a couple of big markets,” said Kimberly’s CEO Thomas Falk during the conference call.
Indeed, a look at quarterly data from the Centers for Disease Control and Prevention shows that in Q1 the general fertility rate—the total number of births per 1,000 women aged 15-44—was 57.7. That’s down 3.8% from Q1-2016, when the fertility rate was 60.0, and it’s the only time the quarterly figure has dropped below 60.0 looking back to Q1-2015.
Baby care, which includes diapers and wipes, kicked in 14% of P&G’s $65.1 billion of total sales in FY-2017. Kimberly-Clark doesn’t break out its product lines as finely; however, it reports that its personal care unit—which includes diapers, wipes, feminine products, and incontinence care products—contributed $9.0 billion, or about half of the company’s sales last year.
(2) Diaper wars. While there may be fewer babies in the US, the amount of competition doesn’t appear to have declined at all. And many of the players are competing on price, according to our admittedly unscientific research on the matter. We searched on Amazon for the best-selling size 5 diapers, and the top brand was P&G’s low-cost brand Luvs. Its 140-count box was selling for $22.06, or 16 cents a diaper. P&G’s premium (and presumably higher-margin) Pampers size 5 box is the 12th most popular seller, but its 152-count box retails for $52.39, or 35 cents a diaper.
At Target.com, the best-selling size 5 diaper is the Target brand, Up & Up. Its 128-diaper box retails for $21.99, 17 cents a diaper. P&G’s Pampers is the third product listed, and its 92-diaper box sells for $31.49, 34 cents a diaper. Kimberly’s Huggies brand 96-diaper box sells for $24.29, and it’s the 13th product listed. There were also two brands, Honest Company (59 cents per diaper) and Seventh Generation (42 cents per diaper), pitched to buyers who want a more natural alternative or have kids with allergies.
(3) Dry cleaning for hair. The other theory P&G discounted was that consumers were spending more on services, like their mobile phone service, and therefore spending less on staples. “I want a cell phone, so I am not going to wash my hair; it doesn’t make a lot of sense to me,” said Moeller.
Again, we turned to Amazon for answers. Amazon listed the top three shampoo sellers: Nizoral, an anti-dandruff shampoo owned by Johnson & Johnson; PURA D’OR, an anti-hair loss shampoo that’s independently owned; and Art Naturals Organic Moroccan Argan Oil shampoo, which also appears to be independent. Maybe people haven’t stopped buying shampoos, just the major brands’ offerings—choosing products pitched as more natural that come from boutique manufacturers instead?
In fifth place on Amazon’s best-selling shampoos list was Batiste Dry Shampoo, owned by Church & Dwight. For the gentlemen in the audience, dry shampoo is a product used to “clean” dry hair instead of washing hair with shampoo. It has grown in popularity as women have gotten busier and as pin-straight hair has gained in popularity. Women don’t want to get their hair blown out by a professional every day, so they’ll do it on a Monday and use dry shampoo for a few days to make the blowout last. (Once hair is washed, it won’t stay perfectly straight anymore.) The trend started a few years ago. Perhaps it suggests that women are indeed washing their hair less often?
P&G has offerings in the dry shampoo category. However, the top sellers on Amazon’s list are Church & Dwight’s Batiste and independent brands Amika and Not Your Mother’s.
(4) Costlier pulp. Another interesting takeaway from both conference calls was the mention of higher commodity prices. P&G’s Moeller explained: “Following the natural disasters we’re now estimating about a $300 million profit hit from higher commodity costs. We knew we’d see higher pulp cost going into year, these costs have continued to increase beyond initial forecast ranges. Ethylene, propylene, kerosene, and the polyethylene and polypropylene resins have increased recently primarily as a result of the hurricanes in the Gulf.”
Kimberly-Clark also called out higher prices for pulp, which is used in tissues, paper towels, and diapers. The company’s CFO Maria Henry reported: “Commodities were $115 million drag in the quarter, and we now expect full year inflation will be slightly above our previous estimate of $200 million to $300 million. This outlook includes somewhat higher cost estimates for pulp and polymer resin.”
(5) By the numbers. As the year enters its final stretch, the Consumer Staples sector finds itself far behind in the derby race among S&P 500 sectors. Here’s where things stand ytd as of Tuesday’s close: Tech (30.8%), Health Care (20.6), Materials (18.3), Financials (15.1), Industrials (14.9), S&P 500 (14.8), Utilities (12.9), Consumer Discretionary (11.8), Real Estate (5.1), Consumer Staples (3.9), Energy (-9.7), and Telecom Services (-13.7) (Fig. 1).
The Staples sector is expected to see revenues jump 3.4% and earnings gain 7.4% over the next 12 months (Fig. 2). The pace of earnings growth has decelerated over the years, yet the sector’s forward P/E has climbed steadily to 19.2 since bottoming at 11.2 in March 2009 (Fig. 3). As a result, the sector’s P/E-to-growth ratio has jumped to 2.4, up from 1.5-2.0 in years past (Fig. 4).
Some industries in the Staples sector have managed to buck the trend and turn in strong stock performances so far this year. The S&P 500 Distillers & Vintners is up 35.4% ytd, and Personal Products, which is solely Estee Lauder, has gained 23.9%. Hypermarkets & Super Centers jumped 18.6% thanks to the gains in Walmart stock, and Soft Drinks (9.2%) and Tobacco (7.1) enjoyed smaller gains.
P&G and Kimberly are both members of the S&P Household Products industry, which has added 4.0% ytd (Fig. 5). The industry is expected to grow revenues by 3.1% and earnings by 6.7% over the next 12 months (Fig. 6). Even though the industry is growing earnings at a much slower pace than the S&P 500, Household Products has a much higher forward P/E, 21.7, than does the broader index.
The above-market P/E is one of the reasons that we haven’t favored the sector. Another has been the Food Retail segment, which is down 20.7% ytd due to the decline in Kroger shares (Fig. 7). We thought the industry would face tough times as Amazon grew more aggressive and as German discounters expanded in the US. Indeed, forward earnings estimates have fallen precipitously, and are now expected to decline 3.1% (Fig. 8). In just the past year, the industry’s forward P/E has compressed to 10.6 from 14.7 (Fig. 9).
Times may remain tough. P&G’s Moeller noted that the sales you see in stores aren’t being funded by his company: “[R]etailers, particularly in the US, are choosing to make investments in price as they compete with each other. And that shows up in the scanner data as a promotion, but it’s not one that’s been funded by the manufacturer.”
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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