Industry Surveys Household Nondurables Joseph Agnese, Consumer Staples Sector Equity Analyst
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Industry Surveys Household Nondurables Joseph Agnese, Consumer Staples Sector Equity Analyst SEPTEMBER 2014 Current Environment ............................................................................................ 1 Industry Profile .................................................................................................... 16 Industry Trends ................................................................................................... 16 How the Industry Operates ............................................................................... 25 Key Industry Ratios and Statistics ................................................................... 32 How to Analyze a Household Nondurables Company ................................. 34 Glossary ................................................................................................................ 38 Industry References ........................................................................................... 39 CONTACTS: Comparative Company Analysis ...................................................................... 41 INQUIRIES & CLIENT SUPPORT 800.523.4534 clientsupport@ This issue updates the one dated February 2014. standardandpoors.com SALES 877.219.1247 [email protected] MEDIA Michael Privitera 212.438.6679 [email protected] S&P CAPITAL IQ 55 Water Street New York, NY 10041 Please see General Disclaimers on the last page of this report. Topics Covered by Industry Surveys Aerospace & Defense Electric Utilities Metals: Industrial Airlines Environmental & Waste Management Movies & Entertainment Alcoholic Beverages & Tobacco Financial Services: Diversified Natural Gas Distribution Apparel & Footwear: Foods & Nonalcoholic Beverages Oil & Gas: Equipment & Services Retailers & Brands Healthcare: Facilities Oil & Gas: Production & Marketing Autos & Auto Parts Healthcare: Managed Care Paper & Forest Products Banking Healthcare: Pharmaceuticals Publishing & Advertising Biotechnology Healthcare: Products & Supplies Real Estate Investment Trusts Broadcasting, Cable & Satellite Heavy Equipment & Trucks Restaurants Chemicals Homebuilding Retailing: General Communications Equipment Household Durables Retailing: Specialty Computers: Commercial Services Household Nondurables Semiconductor &Equipment Computers: Consumer Services & Industrial Machinery Supermarkets & Drugstores the Internet Insurance: Life & Health Telecommunications Computers: Hardware Insurance: Property-Casualty Thrifts & Mortgage Finance Computers: Software Investment Services Transportation: Commercial Lodging & Gaming Global Industry Surveys Airlines: Asia Foods & Beverages: Europe Pharmaceuticals: Europe Autos & Auto Parts: Europe Media: Europe Telecommunications: Asia Banking: Europe Oil & Gas: Europe Telecommunications: Europe Food Retail: Europe S&P Capital IQ Industry Surveys 55 Water Street, New York, NY 10041 CLIENT SUPPORT: 1-800-523-4534 VISIT THE S&P CAPITAL IQ WEBSITE: www.spcapitaliq.com S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into a computer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; and Lucy Fato, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, S&P SMALLCAP 600, and S&P EUROPE 350 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC. CURRENT ENVIRONMENT Global macroeconomic demand remains sluggish for household nondurable companies in 2014 Household nondurable companies are generally less sensitive to economic conditions than other sectors, because the products they produce, such as soap, toothpaste, and bathroom tissue, remain staples of everyday life. However, in the slowly recovering US economy, there is still a challenging competitive environment for these companies, as they battle for a share of limited consumer spending. Fortunately, some signs of economic improvement have been manifesting themselves, and we think the outlook for the US consumer has strengthened slightly in early 2014. While job growth is mostly just keeping up with population growth, real wages (i.e., adjusted for inflation) remained positive for most of 2013 (mainly due to slower inflation), even accelerating more recently on lower energy costs. In our view, this has been providing consumers with a little extra spending power. In addition, despite rising mortgage rates that adversely affect affordability for many consumers the housing recovery appears to be on course, with home prices continuing their upward trajectory after bottoming early in 2012. Lastly, the headwind of a 2% increase in payroll taxes that consumers faced throughout 2013 is finally behind us. On the other hand, household savings are still likely depressed due to the impact of the 2008–2009 recession, and higher stock prices have benefited a smaller, wealthier segment of the population, in our view. The unemployment rate remains elevated, and we think recent declines are more a function of discouraged workers ceasing their job searches and exiting the labor force, as opposed to more people getting jobs. We also think the quality of new jobs has been below average. For 2014, we see new headwinds coming from the expiration at the end of December 2013 of the extended federal unemployment benefits, affecting 1.3 million Americans. Another 1.9 million people were expected to lose their benefits in the first half of 2014, as Congress barred the renewal of benefits. Additionally, on November 1, 2013, expanded benefits provided by the American Recovery and Reinvestment Act of 2009 (ARRA) ended for the Supplemental Nutrition Assistance Program (SNAP), commonly known as the Food Stamp Program. This affected approximately 47 million participants in the program, who saw benefits reduced by about 5.5% on average, or up to $36 per month for a family of four. We see some negative impact on household products through most of 2014 as those affected by the cuts divert more money toward food expenditures. As of August 2014, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) forecast that real personal consumer spending would slip to 2.3% in 2014 from 2.4% in 2013. This trend in personal consumer spending would help drive real gross domestic product (GDP) growth to a projected 2.1% in 2014, down from 2.2% actual GDP growth in 2013. In our view, developing markets outside the US continue to offer better growth opportunities, even if some markets have been experiencing modest slowdowns in economic growth rates. Many of the household products manufacturers are cautiously optimistic, and we expect their organic sales growth (excluding the impact of acquisitions, divestitures, and foreign currency movements) in 2014 to be slightly better than it was in 2013. S&P Capital IQ (S&P) also anticipates that profitability in 2014 will be helped by limited cost pressures from raw materials (such as ingredients), similar to trends in 2013, and greater cost savings from recent restructuring programs, partly offset by higher marketing expenditures required to effectively compete in the current environment. High unemployment discourages household formation, relocation Household formation typically occurs when couples start careers, marry, move into a new house, and have children. This process can be beneficial for household products manufacturers, as people stock their homes INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 1 with products, such as cleaning supplies and personal care items. However, we think that labor and housing market dynamics have hurt household formation since the recession. The US unemployment rate, which reached a recent peak of 10.1% in October 2009, has moderated, but it remains relatively high. In July 2014, the unemployment rate was 6.2%, a slight decline from the 6.1% witnessed in the prior month and down more than one percentage point from July 2013. As of August 2014, S&P Economics was forecasting the unemployment rate to average 6.3% in 2014, an improvement from 7.4% in 2013. However, we think that the decline in the unemployment rate has been overstating the recovery in the jobs market. In our view, the decline in the unemployment rate mirrors a decline in the workforce participation rate. That is to say, a greater number of people are giving up on finding jobs and subsequently leaving the workforce. The