Dissonance in the Consumer Sector

MINYANVILLE ORIGINAL I am concerned with what I am seeing in consumer cyclicals, such as restaurants, specialty retailing, etc., compared to what consumers are doing in consumer staples (specifically in food, beverages, and household products). In February, I wrote the following about staples demand: The retail price of food has gone up over the last two years and has been partially passed along by the supermarkets. In the fourth quarter of 2011, according to Nielsen data, food pricing was up 7-7.5% vs. the year before and had accelerated from nearer 3% in the April year-to-date period. At the same time supermarket sales dollars, from a positive 1% in May 2011, were declining at an accelerating rate, falling from negative 2.2% in September to negative 4.4% by year-end. At the same time, the savings rate, which was about 5.3% at the start of 2011, was generally falling throughout the year, ending at around 4.5%. So, the consumer was spending more of his income, but, as far as food was concerned, the numbers imply that he was eating 3-4% less. That's astonishing! Obviously there are other things happening, such as more shopping at lower priced food stores such as Costco (COST). But these are still big numbers relative to those trends, which have been in place for years. There was probably some pantry deloading too. But my guess is that a lot of consumers are eating marginally less and/or have changed their diets significantly. How often does that happen? I have never seen it. I know that gasoline was a problem as well. The pace of increasing prices for both food and gasoline are slowing, but this is still ugly in my opinion. In the third week of February at the huge CAGNY (Consumer Analyst Group of NY) conference focusing on consumer staples, even with some lessening of the intensity of the results, many were talking about it and had no real explanation. The sell-siders I see do not have any either. US-tracked channel scanner data for the latest 12-week period shows a continuation of this trend. Some examples for unit sales are all negative: Heinz (HNZ) -7.4%, Kellogg (K) -3.5%, Campbell (CPB) -7%, and General Mills (GIS) -9.6%. Household product and non-alcoholic beverage unit sales are not as bad as this but clearly sales are poor, especially at Procter & Gamble (PG) where a large number of price cuts were announced on the first quarter earnings conference call. So, it is ugly out there for sales in staples industries. And because this is the case, why should the outlook for consumer spending and earnings estimates on discretionary expenditures be good? The consumer cyclicals are discounting strong earnings recoveries. I recently wrote about Chipotle (CMG) being at nearly $400 per share while it was worth closer to $240. I read one specialty-retailing analyst who said that his group was up 37% from its lows. MGM Resorts (MGM) is up 51% from its December low. Harley-Davidson (HOG) stock is at $53 from $35 over the same period. I could go on. Now I have predicted that the American consumer would try to regain the "old normal" as much as possible in the face of a lower standard of living over these past few years. I also said that one of the easiest ways to do this would be to spend less on branded consumer staples and redirect the money to consumer discretionary spending. But I have no evidence that the in-place trend toward more private label units has significantly accelerated lately. There is also the trend toward more shopping at lower-priced food outlets, but that has not seemed to have accelerated markedly lately, and would have been cited by analysts at CAGNY as the answer to the lessened units in tracked channels, if it had. Therefore, this does not give me confidence in, for example, the casual dining sector's comparable same-store sales strength. Another explanation might be that people who still have their jobs are now feeling better about keeping them and are spending more freely on consumer discretionary items. Indeed this does happen after recessions and is a source of recovery strength. But what I see in consumer staples seems to outweigh my expectation of the strength of this trend. Finally, there is the barbell, the rich vs. the poor (and longer-term unemployed) explanation. I would tend to put some faith in this. But how many relatively well-to-do people are going to be switching from family dining stores to their casual dining counterparts, for instance? The moves have been in mainstream products that appeal to the middle-class. The bottom line is that I would be very suspect of earnings estimates in the consumer cyclicals sector now.