The ZRG Consumer 100 is a market capitalization-weighted index that tracks the stock market performance of the world’s most innovative and important consumer-focused companies. ZRG Consumer 100 companies are selected using an algorithm that considers brand power, investments in innovation, total revenue, and revenue growth, among other factors. All regions of the world are represented and constituent firms are split 62%/38% between the consumer discretionary and consumer staples industries. Thus, the ZRG C100 provides a singular view into the performance of those companies who are defining and often reinventing consumer products and services experiences worldwide.
Certainly, the story of the Consumer industry is one dominated by the significant impact of the coronavirus crisis. However, the past year for C100 firms can also be viewed as a period of confirmation and contradiction.
Confirmation: A slowdown in revenue and profit growth that began in 2018 continued through 2019 and into Q1 2020.
Contradiction: While 14 C100 firms canceled their dividends as the coronavirus crisis worsened, 22 firms took positive dividend actions (18 index members affirmed and four actually increased their payouts to investors); further, despite the sharp business contraction in the current fiscal quarter, equity analysts remain bullish about a profit recovery in the second half of the year.
It has been – and will likely continue to be – a year of countervailing trends, and we’ll use the ZRG Consumer 100 to help make sense of the latest developments.
The Power of Brand and Innovation: The ZRG Consumer 100 Outperforms the Market
From May 1, 2019 through April 30, 2020, the ZRG C100 returned 8.1%, outpacing the S&P 500 by 7%. The index also grew 7.1 points more than the consumer staples industry group (as proxied by the Consumer Staples ETF, XLP) and 11 points more than the consumer discretionary (as proxied by the Consumer Discretionary ETF, XLY).
While myriad factors are behind this outperformance, it seems that as the Consumer industry overall faced first decelerating growth in 2019 and then outright contraction in 2020, consumer firms with significant brands and sustained investment in innovative products and services have remained in favor with investors.
A Tale of Two Growth Stories: Fast & Slow
ZRG C100 firms experienced strong revenue growth over the past three years, increasing their aggregate revenue at a 6.56% compound annual growth rate (CAGR) while driving even faster growth in EBITDA and cash from operations at 7.14% and 7.43% CAGRs, respectively.
However, as the graphic above shows, 2019 was different from a growth perspective than the preceding two years; while revenue grew 4%, but cash from operations was flat, and profitability actually ticked slightly downward. Thus, C100 firms entered 2020 with businesses that were simultaneously in a historically strong position but facing growth headwinds.
Don’t Call it a Comeback: Earnings Expected to Reach Pre-Crisis Levels in Q4 2020
Obviously, earnings performance in 2020 has been influenced massively by the combined impact of the COVID-19 virus on society and business. It is no surprise that ZRG C100 earnings have dropped dramatically from their Q4 2019 level.
More interesting, however, is what may lie ahead. Using the lens of equity analyst consensus earnings estimates (depicted in the chart above), we are expecting earnings to bottom out in the current quarter and then experience a sharp rebound into the third and fourth quarters of this year — with aggregate profitability almost recovering to where it was in Q4 2019. A full recovery will have to wait for Q3 2021 (given expectations of a typical seasonal earnings decline in the first half of 2021), but the good news is that earnings are then expected to rocket forward.
Here at ZRG, we are encouraged by the expectations, but acknowledge that there is a high degree of uncertainty about the next month let alone the next year. We will be carefully tracking revisions in future reports to help readers better assess changing expectations over time.
Dividend Confidence Despite Everything: Over 80% of Dividend-paying ZRG Consumer 100 Firms are Continuing to Return Cash to Shareholders
While analyst expectations do reflect management guidance, there can be no doubt that projections of earnings six, twelve, or eighteen months into the future are subject to great uncertainty. However, the short-term optimism for an earnings recovery seems justified given that most ZRG Consumer 100 companies are “putting their money where their mouth is” and continuing to pay their regularly scheduled dividends.
We certainly don’t want to look past the reality that 14 Consumer 100 firms did suspend their dividends; notably Dunkin Brands and Signet Jewelers joined firms like Carnival Corporation, Accor SA, Hilton Worldwide, Macy’s, and Marks and Spencer—among others—in taking this direct step to preserve capital. However, 69 of the 83 firms who were paying a dividend on January 1, 2020 are still doing so—with 18 of these firms affirming their intention to pay their dividends and four actually announcing dividend increases (Ahold Delhaize, Apple, eBay, and Costco Wholesale).
Thus, ZRG C100 companies’ management teams collectively seem to believe that however deep the depth of this current quarter’s downturn, we will see a return to more normal conditions in the second half of this year.
In the Consumer Goods sector, Philip Morris International announced Emmanuel Babeau has been appointed Chief Financial Officer. Mr. Babeau has served at Schneider Electric SE in various executive capacities since 2009, most recently, as Deputy CEO. Tupperware Brands Corporation has appointed Miguel Fernandez as President and Chief Executive Officer. Mr. Fernandez is the former Global President of Avon Products Inc. The Board also has appointed Richard ("Rich") Goudis as Executive Vice Chairman. Mr. Goudis is the former Chief Executive Officer of Herbalife Nutrition Ltd.
In the Retail sector, Bed Bath & Beyond Inc. announced the appointment of Gustavo Arnal as Executive Vice President, Chief Financial Officer (CFO) & Treasurer. Arnal joins the company following his previous role as Group CFO of Avon. Rafeh Masoo, former SVP, Chief Digital Officer at BJ's Wholesale Club joins the company as Executive Vice President, Chief Digital Officer. Marks and Spencer Group plc appointed Tamara Ingram and Sapna Sood as a Non-Executive Directors. Tamara is currently Non-Executive Chair of Wunderman Thompson and a Non-Executive Director for Marsh MacLennan. Sapna has been Non-Executive Director at Kering for the last four years. The Gap, Inc. appointed Sonia Syngal as the company's Chief Executive Officer (CEO) and Board Director. Bob L. Martin, a current director of the company, will serve as Executive Chairman of the Board. The Board also elected two new members to serve on its Board of Directors: Amy Miles, former CEO of Regal Entertainment Group and Elizabeth Smith, the former CEO of Bloomin’ Brands. Casey’s General Stores, Inc. announced Ena Williams as Chief Operating Officer and Steve Bramlage as Chief Financial Officer. Bramlage was most recently the CFO at Aramark while Williams served as SVP, International at 7-Eleven.
In eCommerce and Consumer Digital, eBay Inc. announced Jamie Iannone as incoming Chief Executive Officer and Board Director. Most recently, Mr. Iannone was Chief Operating Officer of Walmart eCommerce, and he has over 20 years of experience leading digital pure-play and omnichannel platforms for some of the world's premier consumer-facing companies. Shutterfly, Inc. announced the appointment of Vivian Liu as Senior Vice President & Chief Financial Officer. Most recently, Vivian was SVP & Chief Financial Officer at Lexmark International. Overstock.com, Inc. appointed Adrianne Lee as Chief Financial Officer. Lee joins Overstock from The Hertz Corporation where she was SVP & CFO.
In Food & Beverage, Calavo Growers, Inc. announced that Kevin Manion has been appointed Chief Financial Officer. Prior to joining Calavo, Mr. Manion held financial leadership positions with companies including Century Snacks, Bolthouse Farms, Hostess Brands, Nestle USA and Kraft General Foods. Campbell Soup Co. appoints of Rebecca Gardy as Vice President, Investor Relations, formerly SVP, Investor Relations, Public Relations & Corporate Communications GreenSky Inc., a FinTech company. Sambazon, the açaí-based food, and beverage producer, appointed Alan Murray as Chairman. Murray was formerly CEO of Goodbelly and Chair of SunOpta. Kraft Heinz appointed former Campbell Soup executive, Carlos Abrams-Rivera, to US Zone President, leading all US business operations.
In Travel & Hospitality, Expedia Group, Inc. named Peter Kern as Chief Executive Officer of the company. Peter Kern has been a key member of its Board since 2005 and became Vice Chairman in 2018. Mr. Kern has spent decades in leadership roles in public and private settings, most recently as the CEO of Tribune Media.TravelCenters of America Inc. announced that Peter J. Crage has been appointed as Executive Vice President, Chief Financial Officer and Treasurer. Mr. Crage he served as Chief Financial Officer of Diamond Resorts. Brian Niccol, who previously led Yum! Brands’ Taco Bell division as CEO, has taken over as both CEO & Chairman of Chipotle Mexican Grille. Atrium Hospitality announced the appointment of Chris Dunne, formerly of InterContinental Hotels Group, to Chief Financial Officer.
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