The challenging macroeconomic conditions have not been able to mar consumer spending, as evident from the recently released impressive retail sales data. Despite inflation remaining high, a robust job market and increased disposable income might keep consumer spending healthy in the near term. The upcoming holiday season should further boost spending on consumer goods.
Given this backdrop, investors could consider investing in fundamentally strong consumer goods stocks Unilever PLC (UL), Virco Mfg. Corporation (VIRC), and Acme United Corporation (ACU), instead of Peloton Interactive, Inc. (PTON), which is struggling to stay afloat.
Consumer spending remained steadfast despite the macroeconomic challenges, as evident from the 0.7% sequential increase in retail sales in September. The rise in retail sales was more than twice what economists had expected.
A robust job market and rising disposable income should keep boosting consumer spending. Wells Fargo Economics’ senior economist Tim Quinlan said, “We have repeatedly underestimated the U.S. consumer.” Deloitte expects holiday retail sales to increase between 3.5% and 4.6% this year. The global consumer goods sector is expected to grow at a CAGR of 7.8% to reach $224.33 billion by 2032.
Exercise equipment company PTON failed to surpass the consensus EPS and revenue estimates in the fiscal fourth quarter (ended June 30, 2023). Its subscribers declined by 29 thousand sequentially during the quarter. Additionally, the company had an additional expenditure of $40 million during the quarter for actual costs incurred and anticipated future recall-related expenses.
Moreover, an anticipated 15 to 20 thousand of its 2.2 million impacted members paused their monthly subscriptions in the fourth quarter pending the receipt of a replacement seat post. The company’s total revenue for the fourth quarter ended June 30, 2023, declined 5% year-over-year to $642.10 million. PTON continued to bleed money as its free cash flow was negative $74 million.
Analysts expect PTON’s EPS for the first quarter to remain negative. Its revenue for the same quarter is expected to decline 4.2% year-over-year to $590.66 million. Recently, PTON was downgraded to Underperform by Bank of America analysts, with a cut in its price target to $4.
Moreover, in terms of profitability, PTON lags behind its peers. PTON’s trailing-12-month net income margin is negative 45.06% compared to the 4.40% industry average. Likewise, its trailing-12-month Return on Common Equity is negative 847.35% compared to the 11.17% industry average. Furthermore, the stock’s 0.82x trailing-12-month asset turnover ratio is 18.3% lower than the industry average of 1.01x.
Recently, PTON and Lululemon entered into a strategic five-year partnership that would make the companies each other’s exclusive apparel and content providers. Despite the positives of this partnership, PTON will have to deal with these expensive recalls.
PTON’s stock has performed poorly, declining 59.3% over the past three months and 38% over the past year to close the last trading session at $4.64.
Therefore, investors could consider buying UL, VIRC, and ACU to capitalize on solid consumer spending. Let’s discuss the fundamentals of these three Consumer Goods stocks, starting with the third choice.
Stock #3: Unilever PLC (UL)
UL is based in London, the United Kingdom. It operates as a fast-moving consumer goods company. Its segments include Beauty & Wellbeing, Personal Care, Home Care, Nutrition, and Ice Cream.
On June 14, 2023, UL announced that it would acquire U.S. Greek yogurt brand Yasso Holdings. The acquisition would help UL expand its presence in the premium dessert market, and it will become part of UL’s Ice Cream Business Group and join its portfolio of premium brands like Magnum, Talenti, and Ben & Jerry’s.
UL’s revenue grew at a CAGR of 5.7% over the past three years. Its net income grew at a CAGR of 12% over the past three years. In addition, its EPS grew at a CAGR of 13.2% in the same time frame.
UL’s turnover for the first half ended June 30, 2023, increased 2.7% year-over-year to €30.43 billion ($32.20 billion). Its operating profit rose 22.6% year-over-year to €5.52 billion ($5.84 billion). The company’s net profit increased 20.7% year-over-year to €3.88 billion ($4.11 billion). Also, its EPS came in at €1.40, representing an increase of 23.6% year-over-year.
In addition, its net cash flow from operating activities increased 10.4% over the prior-year period to €3.37 billion ($3.57 billion).
For the quarter ending March 31, 2024, UL’s revenue is expected to increase 0.1% year-over-year to $16.28 billion. Its EPS for fiscal 2024 is expected to increase 5.9% year-over-year to $2.92. Over the past year, the stock has gained 7.5% to close the last trading session at $48.53.
UL’s POWR Ratings reflect solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #13 out of 52 stocks in the Consumer Goods industry. It has a B grade for Stability. Click here to see the other ratings of UL for Growth, Value, Momentum, Sentiment, and Quality.
Stock #2: Virco Mfg. Corporation (VIRC)
VIRC designs, produces, and distributes furniture. It offers seating products, including 4-leg chairs, cantilever chairs, mobile task chairs and lab stools, tablet armchairs, steel-frame and floor rockers, series stools, hard plastic seating, folding and upholstered stack chairs, and plastic stack and upholstered ergonomic chairs. The company also provides activity, butcher block, folding, office, technology, and mobile tables, desks and workstations, etc.
VIRC’s revenue grew at a CAGR of 14.3% over the past three years. Its EBITDA grew at a CAGR of 89.8% over the past three years. In addition, its total assets grew at a CAGR of 7.7% in the same time frame.
For the fiscal second quarter ended July 31, 2023, VIRC’s net sales increased 29.6% year-over-year to $107.32 million. Its gross profit rose 52.5% over the prior-year quarter to $48.58 million. The company’s net income increased 60.5% year-over-year to $15.53 million. Also, its EPS came in at $0.95, representing an increase of 58.3% year-over-year.
Street expects VIRC’s revenue for the quarter ending October 31, 2023, to increase 5.1% year-over-year to $81.30 million. Its EPS for fiscal 2024 is expected to increase 9.8% year-over-year to $1.12. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 63.7% to close the last trading session at $6.76.
VIRC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
Within the same industry, it is ranked #10. It has an A grade for Sentiment and a B for Momentum. To see the other ratings of VIRC for Growth, Value, Stability, and Quality, click here.
Stock #1: Acme United Corporation (ACU)
ACU supplies first aid and safety, cutting, sharpening, and measuring products to the school, home, office, hardware, sporting goods, and industrial markets. The company offers scissors, shears, knives, rulers, pencil sharpeners, safety cutters, glue guns, and other craft products under the Westcott brand and cutting tools under the Clauss brand. Its other brands include Cuda, DMT, First Aid Only, PhysiciansCare, Spill Magic, First Aid Central, and Med-Nap.
On September 27, 2023, ACU announced the acquisition of selected assets of Hawktree Solutions, Inc., a supplier of first aid and survival kits, medical supplies, and training. The acquisition is expected to be accretive from the fourth quarter of 2023.
ACU’s Chairman and CEO Walter C. Johnsen said, “Hawktree Solutions will expand our product line of first aid and survival items that are focused on devastating fires, floods, and earthquakes. We intend to work closely with the Canadian Red Cross to deliver outstanding products to those impacted by natural disasters. In the short term we will be re-activating the Hawktree website, filling existing orders, and working with customers on new programs.”
ACU’s revenue grew at a CAGR of 7.3% over the past three years. Its EBIT grew at a CAGR of 3.7% over the past three years. In addition, its levered FCF grew at a CAGR of 26.5% in the same time frame.
ACU’s net sales for the third quarter ended September 30, 2023, increased 1.3% year-over-year to $50.38 million. Its gross profit rose 22.5% over the prior year quarter to $19.50 million. The company’s net income increased significantly year-over-year to $2.15 million. Also, its EPS came in at $0.58, representing a considerable increase year-over-year.
Analysts expect ACU’s EPS and revenue for the quarter ending December 31, 2023, to increase 394.1% and 5% year-over-year to $0.50 and $46.31 million, respectively. The stock has gained 35% year-to-date to close the last trading session at $29.57.
ACU’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It is ranked first in the Consumer Goods industry. It has an A grade for Growth and Sentiment and a B for Value. Click here to see the other ratings of ACU for Momentum, Stability, and Quality.
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UL shares were trading at $47.29 per share on Thursday morning, down $1.24 (-2.56%). Year-to-date, UL has declined -3.56%, versus a 9.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
3 Consumer Good Stocks to Invest in Instead of Peloton Interactive (PTON) StockNews.com
