Equity View: Will Investors Keep Losing Appetite for Consumer Staples Stocks?

Summary 

• The consumer staples sector has underperformed the broader market by more than three points in recent months. 
• Processed food giant Conagra Brands and alcoholic beverage vendor Constellation Brands reported solid earnings beats – but also pointed to changing consumer behaviour. 

• One big change is apparently growing appetite for appetite suppression drugs, which seems to be hitting food sales. 
• PepsiCo (PEP) and Coca-Cola (KO) stocks are down about 5% this week on concerns that these drugs will hit salty snack and calorific soft drink sales. 
• The moment of truth is coming – PEP reports Tuesday, 10 October. 

Market Implications 

• The consumer staples sector is due for a bump when PEP reports – whether up or down remains to be seen.  

Earnings Beats Will Not Cut It Any More 

Consumer staples giants are running into heavy weather. Since the recent high in late July, the S&P 500 is down 8.2% and the consumer staples sector (represented by the ETF XLP) is down 11.4%. 

Earnings this week from Conagra Brands (CAG) and Constellation Brands (STZ) provide some insight. 

CAG, maker of processed food brands such as Birds Eye, Slim Jim’s, Duncan Hines, and Hunt, reported a solid earnings beat, an outlook in line with expectations, but missed slightly on revenue. CAG’s stock is down nearly 3%. It said it is seeing softer sales in refrigerated/frozen foods and ‘changing consumer behaviour.’ 

STZ, a beer, spirits, and wine vendor beat on earnings and revenue and its outlook is solid. But it is depending more on beer sales than spirit sales for growth, and apparently investors thought people would have drunk more beer given the hot summer. Its stock is down 3.2%. 

Clearly, it does not take much to upset investors these days. 

People Are Eating – Just Not Food 

Away from that, grocery giant Walmart (WMT) is attributing slightly softer sales to people taking appetite suppressing drugs such as Ozempic and Wegovy.   

Hard to believe? Well, PepsiCo stock is down 5.3% today; Coca-Cola is down 4.8%. Both on concerns that these drugs are suppressing demand for their salty snacks and calorific soft drinks.  

Wow! Granted, something more may be going on. These two companies have been at the forefront of shoving up prices far ahead of inflation over the past year. Maybe they have simply priced themselves out of the market and more people just cannot – or will not – eat or drink their products anymore. 

PEP reports Tuesday, 10 October. Talk about a coming moment of ‘Truth’. We can see XLP bumping up or down depending on what PEP reports. 

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)