What to watch for from consumer staples this earnings season
In light of earnings from Coca-Cola (KO), Kraft Heinz (KHC) and others, Raymond James' Olivia Tong joins Yahoo Finance Live to discuss trends in the consumer staples space.
Tong notes organic sales growth remains strong overall despite consumers staying value-focused. Companies with "international exposure" are seeing particular strength, like Colgate-Palmolive (CL) outpacing Proctor & Gamble (PG) despite P&G's "strong gross margin."
Tong also identifies companies catering to both "ends of the spectrum" in terms of consumer budgets are performing well. She cites beauty brand E.L.F's (ELF) 85% sales surge thanks to shelf space gains, and value-conscious price points.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Angel Smith
Video Transcript
RACHELLE AKUFFO: Consumer staples in focus this week as we see a number of companies report their quarterly results. Coca-Cola out this morning beating the Street's revenue expectations, showing consumers are still buying cans of Coke despite those higher prices. And we saw similar results in the last month from Colgate and Procter Gamble, both showing higher sales thanks to increased prices.
Our next guest is tracking both of those companies. Olivia Tong, Raymond James' senior consumer staples analyst. Thank you for joining us this morning. So, what have we learned so far this earnings season about the state of the consumer and any sort of trade offs we're starting to see?
OLIVIA TONG: Sure. Thanks again for having me. I think a couple of things to keep in mind. Organic sales is still very strong. You see very strong sales growth across consumer staples, across beauty, particularly in the US. The consumer has been pretty resilient.
They've stuck to their brands and they are looking for value, but continue to look for growth, both in terms of price and mix. Volume is starting to recover off of some pretty tough comps, but we continue to be quite bullish on the sector.
BRAD SMITH: Where is the strongest element within this sector as of right now? As we're starting to-- and as Rochelle was mentioning, some of the reports that came through this morning really kind of giving us a sense of where these companies are continuing to push price through versus where they're just trying to make sure that they're maintaining market share.
OLIVIA TONG: Sure. I think quite frankly, we like the multinationals or the domestics. We went into the year thinking that. And you're seeing that play out. Colgate grew faster than P&G this quarter. Coke over Pepsi.
Now that said, the other area that we do like is companies that cater to either the tail end-- either tail end of the income spectrum versus in the middle. So you think about a company like e.l.f., for example, in beauty. Their average price points are in the $6 to $7 range.
They grew sales 85% in the quarter. So you're really seeing consumers look for value at both ends of the spectrum. Either if they're willing to pay a premium, they want some value add associated with that or a fairly low price point and, quite frankly, value associated with that as well.
RACHELLE AKUFFO: So Olivia, in terms of your top pick in staples and discretionary here, what are the standouts and why?
OLIVIA TONG: Sure. We do like Colgate. We do like Procter. And we do like e.l.f., as I mentioned earlier. With respect to Colgate and Procter, we think that they will continue to grow faster than their peer set. Colgate, in particular, has a lot of international exposure, 80 plus percent international exposure.
So as you see disproportionate amount of pricing, Colgate will benefit from that. Whereas P&G, as sort of your steady Eddie, continue to grow price and mix. Very strong in terms of innovation and very strong gross margin and operating margin improvement.
And quite frankly, the gross margin has been so strong that they've been able to spend a lot of that back in terms of advertising and other brand support. Within the beauty area, we really do like e.l.f. That continues to really resonate with us. We think there's a lot of white space opportunity there with respect to shelf space, international, different retailers as well.
And they've been gaining shelf space and they continue to gain shelf space across a number of categories. So we are very bullish on e.l.f. and think that there continues to be a lot of opportunity there even with the tough comps.
