For Immediate Release

Chicago, IL – October 15, 2014 – Today, Zacks Equity Research discusses the Consumer Staples (part 3), including Unilever plc (UL-Free Report), Coca-Cola Enterprises, Inc. (CCE-Free Report), Kimberly-Clark Corp. (KMB-Free Report), PepsiCo Inc. (PEP-Free Report) and Procter & Gamble Co. (PG-Free Report).

Industry: Consumer Staples (part 3)

Link: http://www.zacks.com/commentary/34854/

Weather took most of the blame for the sub-par business activity levels in the first quarter of the year, prompting many companies in the consumer staples sector to provide weak guidance. But even as weather improved in Q2, the guidance picture didn’t. The reason for that was the continued difficult consumer spending environment, foreign exchange headwinds and declining unit volumes. While stock prices in the sector have done well lately (consumer staples have outperformed the broader S&P 500 index year to date), many of those issues are still with us.

The sector’s defensive attributes no doubt position it to benefit from the prevailing uncertain market backdrop, but market sentiment will shift against the group if macro visibility improves given these challenges.

Uncertain Economic Environment

Though we did witness some signs of economic recovery and improving consumer confidence in the U.S., there is still much uncertainty. The labor market has been making steady gains lately, but we have yet to see much improvement in household buying power as a result of stagnant wages.

The recent drop in oil prices should help consumer finances this holiday season, but the uncertain global environment could prompt many consumers to save the gain instead of spending it. The economic picture in Europe is steadily weakening and the outlook for Japan also remains uncertain. No doubt, consumer product company Unilever plc (UL-Free Report) is witnessing weakness in the developed markets with little sign of recovery in North America or Europe.

Notably, Coca-Cola Enterprises, Inc. (CCE-Free Report) expects fiscal 2014 sales and profits to be at the lower end of its previously provided range, as the company expects challenging retail consumer and competitive environment in Great Britain and poor weather conditions in France.

Slowdown in Emerging Markets and Unfavorable Foreign Exchange

Consumer staple companies are witnessing sluggish growth in the developed economies. Market saturation, along with stagnant disposable income and increased competitive activities, add to the companies’ woes.

This is the reason why companies have been looking to faster growing emerging markets. Though a good strategy in the long run, the near-term outlook for many of these markets remains uncertain.

Emerging markets have become increasingly volatile due to fluctuating currencies and other structural issues. The Middle East, Russia and Ukraine are witnessing continued political and civil unrest resulting in challenging operating conditions. Developing countries like China, Brazil and Mexico are also facing some economic slowdown.

Moreover, owing to a significant presence in the emerging markets, the companies’ profits are being affected by currency headwinds, given the recent weakening of many emerging market currencies. In particular, the recent currency fluctuations in Venezuela, Argentina and Turkey are a major concern. Foreign exchange is a major headwind for companies like Kimberly-Clark Corp. (KMB-Free Report), Unilever, PepsiCo Inc. (PEP-Free Report), which have significant business outside the U.S.

Unilever plc is anxious as the pace of sales growth has continued to slow down since the fourth quarter of 2013, mainly due to its operations in emerging markets, which account for two-third of its revenues.

Consumer product giant The Procter & Gamble Co. (PG-Free Report) is facing business disruption and substantial price reduction in Venezuela following the publication of new price control regulations in the country. Moreover, volatile market dynamics in countries like Argentina (import restrictions and price controls), Egypt, Syria and South Korea and political unrest in Russia, the Middle East and Ukraine are compounding problems.

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