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Consumer staples: P&G saw ‘huge surge in demand’ amid COVID-19, analyst says

Raymond James Managing Director & Senior Consumer Staples Analyst Olivia Tong joins Yahoo Finance Live to discuss key considerations for investing in home and beauty consumer staples, currency inflation, consumer spending, and the outlook for Estée Lauder’s brand portfolio.

Video Transcript

- The consumer staples sector is facing a difficult start to 2023, down nearly 2% as investors shift away from the space. But our next guest is listing out some key considerations for holding these home and beauty names. Raymond James managing director Olivia Tong joins us now. What is the number one consideration that people should be keeping in mind with regard to these names?

OLIVIA TONG: Thanks for having me. Appreciate it. A couple of things to think about-- the most important things I would say from the top line is the mix between price versus volume, so how many units somebody buys versus the price increases that are coming through. And then, on the margin line, on the isoprofit line, it's really around gross margin because the pressures from higher costs and unfavorable currency movements, which you've heard about, they are lingering for longer.

So you'll see a little bit more pressure as we kind of move into the next couple of quarters. And then, by the time we get to the second half, you'll see a lot of those cost increases start to lap. So it should get better by second half of the year.

- Yeah, Olivia, to your point, I was interested to see it in some of the consumer goods companies we've heard from so far, them talking about that the cost increase-- that their input cost increases are still happening, right-- that they're still trying to cope with that. What should we look for in terms of companies that are still going to have sustainable pricing power as their input costs continue to rise?

OLIVIA TONG: Sure, it's a great question. I think a couple of things to think about. First is market shares. So those with the higher market shares, those with a lot of innovation, they can get away with a little bit more pricing, right?

They can hold on to a little bit more, and people will be willing to pay a little bit more for some improved efficacy or ease of use or convenience or what have you. But you're right, the pressures from these higher costs and unfavorable effects, they have been lingering for a little bit longer. And on the flip side, what you're seeing also is that a lot of these multinational companies, right-- there's a little bit of a misconnect between where you produce things versus where you sell them, so that magnifies that impact to some extent.

- Olivia, you have outperform ratings on Clorox and Procter & Gamel. Does an investor have to own both of those names? Because I would argue, and I'm sure you know this, both of those stories have been very different the past year. P&G execution machine, Clorox just has continued to disappoint investors with earnings.

OLIVIA TONG: Yes, for Procter, I mean, going into earnings season, Procter was our top pick in staples. And it's a very important time here in the sector. As you know, I've been focused on this sector for many years. And in this space, we've seen a huge surge in demand during COVID.

Some of this demand stays higher because our habits have changed, hybrid work, et cetera, it means more consumption at home. But more importantly, I think for Procter, it's likely one of the earlier ones to see gross margin turn, and we think the fact that it hits multiple price tier points across its most important categories will benefit them through what could be, as you notice, a choppy macro period.

Clorox is reporting this week, they're reporting Thursday after the close. This is more of a turnaround story. They had a really challenging time with gross margins last year. So the comp is-- as a lab, those comps, you should start to see some improvement there.

- We've heard from all of these companies in one form or another about price normalization. Is there one that's doing the best with that regard?

OLIVIA TONG: I think they're all seeing some increase in price, of course. They've been putting those through all through last year and at the beginning of this year. And some are still taking more price in order to recoup some of the raw material, inflation, and currency inflation that you've seen over the last couple of years. For most companies, you are seeing volume degrade as a result of that.

That's the elasticity that you see when prices go up. People try to be a little bit more mindful with respect to their purchasing. But they're all seeing some negative from volume and price accelerate. I think you'll still see this in the case for the next couple-- probably at least another quarter, possibly two. And then hopefully, as price starts to anniversary, those price increases that they already took, volume starts to pick up a bit. I mean, these are staples categories where you do have to eventually go out and start to consume again.

- Um, Olivia, I notice as I look across your picks here, you have three strong buys in companies that are makeup or sort of personal care companies-- Bath & Body Works, Estee Lauder, Ulta. But then, you also have them scattered across your other recommendations. In other words, I'm curious what differentiates within personal account and makeup those three names-- what are they doing that maybe some of the others aren't?

OLIVIA TONG: Sure-- sure, maybe-- starting with Estee, I think the main focus this week for earnings is the pace of reopening in China and the consumers return to travel, but whether it's domestically within China to Hainan and other travel destinations, and then, also abroad eventually. We think this will be the top focus. Other things that are really interesting with respect to Estee is they acquired Tom Ford a couple of months ago so learning more about the plans there.

That was announced in mid-November and obviously, a very high end brand. So how that anchors the ultra luxe portion of Estee's brand portfolio will be an important place to be paying attention to. E.L.F is another company that we think positively on. It did very well last year, but we think that they have continued momentum. So we think they're one of the best positioned in beauty because they have relatively manageable price points and still a lot of market share opportunity to gain. So quite a bit there. So we do have a bit of an eclectic group and there are pockets everywhere.

- Within that eclectic group, where is the deepest value?

OLIVIA TONG: I think the deepest value in a couple of names. Newell, Newell Brands is one of them. Now that is a challenge-- is a challenge right now because of all the inventory destocking that you've heard at retail. But I think as you get into the back half of the year, this is an inexpensive stock that historically has traded in the 15 to 19 times range pre-acquisition and is now closer to 11 times. So a lot is already embedded into the stock in terms of negativity so we think that as time progresses, that will get more interesting.

- Raymond James managing director Olivier Tong, good to see you. Get some-- have a fun week. I know it's been busy for you and the team, appreciate it.