(News Bulletin 247) – Household consumption has slowed sharply, forcing several listed groups to lower their financial outlook during the last results season. In this context, investors must be even more selective.

Investors are looking for stocks that won’t suffer from a post-pandemic normalization of shopping or even a recession as increasingly spending-conscious consumers limit the pricing power of big companies.

“Consumers have absorbed corporate cost increases through exceptionally high levels of savings. This appears to be coming to an end,” notes Chiara Robba, head of equities at Generali AM.

“The second-quarter earnings season highlights some reduction in consumer spending and efforts by companies to cut prices to support demand,” she added.

The July PMI surveys suggest that companies in the eurozone and the United States are no longer able to pass on their cost increases to consumers as easily.

Profit warnings galore

Many companies have thus published profit warnings during the second quarter, rekindling concerns about growth in the United States and the rest of the world and contributing to the fall in risky assets in early August.

Nestlé and Ryanair in Europe, McDonald’s in the United States, as well as payment companies Visa and Worldline have issued warnings about their prospects.

According to data compiled by BofA, 40 companies lowered their financial outlooks during the latest earnings season, the most in a year, most citing consumer weakness. “Signs of consumer weakness are concerning,” the bank said.

The luxury sector is disillusioned

The luxury sector has not been spared by the trend, in China or elsewhere.

Kering-owned Saint Laurent has cut the price of its Loulou bag by 10 to 15 percent in France, Britain, the United States and China, a “very rare” move for the sector that Barclays said showed the brand felt its previous price hikes were too steep.

Luxury goods inflation appears to be returning to its historical average of 5% to 7%, and could even fall below this level, after three years in which this inflation has been significantly higher than its long-term trend, estimates Luca Solca, an analyst at Bernstein.

“Unpopular brands that have substantially increased their prices, in line with the sector, must now correct these increases through sales and promotions. This is due to the normalization of Western consumer behavior, after the post-pandemic euphoria,” adds the analyst.

Burberry, which sacked its chief executive and warned about its results in July, is a good example, with the stock losing almost 20% of its value on the day of its results.

According to Mediobanca, Swatch and Hugo Boss are two of the most shorted stocks in the Stoxx 600 index, following disappointing results.

Even the LVMH behemoth, the second largest European capitalization behind Novo Nordisk, is not immune to weak consumption.

“With the cost of living crisis, consumers are hesitant about higher prices. This is felt at all income levels, with luxury companies, for example, reporting more difficult conditions for all consumers across the world, particularly in China. Only the richest are exempt,” summarises Sanjiv Tumkur, head of equities at Rathbones IM.

Consumer polarization

Gillian Diesen, manager at Pictet AM, believes that the latest results suggest more of an increased polarisation of consumers rather than a general loss of purchasing power.

“On the high-end side, most premium brands (…) are raising their prices again this year, but at a more normal pace,” she explains, stressing that this trend goes beyond luxury.

Ferrari has thus exceeded expectations despite fluctuating demand in the automotive sector, thanks to sales of its expensive models.

Differentiation is another important factor, and the sectors at risk are those where it is weak, such as personal care and food and beverage, Chiara Robba points out.

Innovative sports equipment groups such as On and Deckers are still posting price and revenue increases, unlike more established names such as Nike and Puma, whose shares hit a six-year low on Wednesday after their results.

In the airline industry, Sanjiv Tumkur warns that Ryanair’s situation is not that of the whole sector, with demand for competitors Easyjet and Jet2 being stronger.

“Ryanair is a low-cost carrier, while its competitors also offer all-inclusive holidays, which are more in demand by consumers. As always, selection will be key,” the manager sums up.

(With Reuters)