• Ebbing inflation reduces firms’ ability to boost prices
  • Wall Street sees revenue growth slowing for the sector

While US consumers may be feeling a measure of relief as inflation cools, investors in the shares of consumer-goods makers aren’t quite as calm.

That’s because ebbing inflation gives companies like Procter & Gamble Co. and Kimberly-Clark Corp. less justification to boost prices on their products, weighing on sales growth and threatening the outlook for profits. It’s a worrisome prospect for the sector’s stocks, which are coming off their worst annual performance relative to the broader market in more than 20 years and are trailing again in 2024.

Wall Street is responding to the sales trend by tempering expectations for revenue growth. Analysts project fourth-quarter results for S&P 500 consumer staples companies will show sales rising 2.8% from a year earlier, the weakest since 2020, and then decelerate overall in 2024, data compiled by Bloomberg Intelligence show.

The bleak backdrop, which also is the result of competition from cheaper brands, explains why Dan Eye, chief investment officer at Fort Pitt Capital Group, reduced holdings of Kimberly-Clark late last year. The move shifted the money manager to underweight on consumer staples stocks.

“It’s just not an area we’re extremely excited about given the muted top-line growth prospects for the group,” said Eye, whose firm manages about $5 billion. “A lot of the companies that we keep an eye on, it does look like they’re seeing some competitive pressure from private-label brands, and we’re expecting to see many of them have to give back maybe some of these aggressive price hikes now that their costs are starting to cool off.”

Warning Sign

P&G, the maker of Pampers and Bounty paper towels and a sector bellwether, kicked off earnings for the group Tuesday, reporting quarterly sales that trailed expectations for the first time since early 2020. The results also showed the silver lining from cooling inflation: Lower commodity prices helped its bottom line and fed into an improved profit outlook, boosting shares.

Bernstein analyst Callum Elliott said he was surprised investors seemed to look past P&G’s disappointing revenue, which he sees as a warning sign for the sector.

Results on Wednesday from Kimberly-Clark did little to ease such concerns. The maker of Huggies and Kleenex reported fourth-quarter sales and adjusted earnings per share that trailed the average analyst estimates.

After a couple of years in which consumer goods producers passed higher costs on to shoppers and reaped fatter profits as a result, Wall Street is bracing for a new dynamic.

Analysts expect this reporting period will be the fifth and final quarter in which the consumer staples group sees earnings growth outpace the rest of the S&P 500, with the sector likely turning into a laggard in 2024, according to BI equity strategists Michael Casper and Gina Martin Adams.

“Unless defensive sentiment makes a comeback, it might be difficult for investors to get excited about staples as a result,” they wrote in a research note last week.

Flip Side

To be sure, there’s a camp that likes the stocks after last year’s steep underperformance, and sees slower price hikes boosting the volume of products sold. That’s the view of David Bahnsen, chief investment officer at The Bahnsen Group, who owns companies including P&G, Clorox Co., and PepsiCo Inc.

On the plus side, the American shopper is looking resilient. Personal spending rose at a stronger-than-forecast 2.8% rate in the fourth quarter, government data showed Thursday, and many economists anticipate consumers can keep driving economic growth in 2024.

At Janus Henderson Investors, research analyst Josh Cummings looks at that mixed landscape and draws distinctions within the sector.

He’s cautious on packaged-food companies, saying they especially have relied on price increases to support sales in recent years.

But he says beverage companies have generally been less aggressive in lifting prices. He highlighted Constellation Brands Inc. as a holding, touting the Modelo maker’s market-share gains.

“In a mature industry like staples, it’s not that easy to grow units, so you really need to focus on market share,” he said.

Looking ahead for the sector, Colgate-Palmolive Co. reports Friday, followed by companies including Clorox next week.

Written by:  and  @Bloomberg

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