KMB Kimberly Clark Corp

By Akane Otani and Michael Wursthorn 

Investors once attracted to the steady payouts of companies selling staples like breakfast cereal, toothpaste and razors are shopping elsewhere.

A series of disappointing earnings reports from industry giants like Philip Morris International Inc., Procter & Gamble Co. and Kimberly-Clark Corp. have sent consumer-goods shares tumbling in recent days -- a sign many investors remain skeptical of the companies' ability to cope with rising costs, as well as to fend off online competitors like Amazon.com Inc.

The sector's underperformance comes as a surprise to analysts who had expected signs of a pickup in inflation to drive investors into shares of businesses that sell household goods and basic necessities: products that consumers would typically be willing to buy, even when rising prices crimp their spending elsewhere. Instead, companies competing with discount retailers are struggling to raise prices for their marquee products -- something recent earnings reports show has become a growing headwind for their businesses.

Even hefty dividend payouts haven't been enough to lure investors into shares of consumer-staples companies, which have shed 13% in the S&P 500 this year and posted the biggest losses of the broad index's 11 sectors. The S&P 500 has fallen 1.5%.

The industry's pricing issues have many money managers wondering whether the biggest makers of household staples have already seen their best days.

"What's happening is that these firms are struggling to pass on rising costs to consumers," said Shawn Cruz, manager of trader strategy at TD Ameritrade. "Big brands have counted on their brand name drawing customers in, and that's not necessarily happening anymore."

One of the worst days of the year for the consumer-staples sector came Thursday, when tobacco giant Philip Morris said quarterly shipments fell more than expected as consumers world-wide continued to turn away from cigarettes. Philip Morris shares fell 16%, posting their biggest one-day percentage decline since going public in 2008, according to FactSet. The stock is off 22% for the year.

Many companies serving up consumer staples have suffered more broadly, though, from rising competition from online retail giants, which have put pressure on firms to keep product prices low.

Shares of Procter & Gamble, the maker of Tide detergent and Pampers diapers, have shed 21% this year, making them one of the worst performers in the sector. The company has cut prices across its businesses, including its Gillette razors, to try to stave off competition from other low-cost rivals like Dollar Shave Club -- something that crimped its sales growth in the most-recent quarter.

Another company that has fallen behind: General Mills Inc., whose shares have tumbled 25% this year as it has grappled with what Chief Executive Jeff Harmening said was an "unprecedented rise in logistics costs."

That has forced it to lower its earnings expectations for the year, with company projections now suggesting per-share earnings for the fiscal year ending in May will rise by just 1% compared with the 4% increase previously estimated. Although freight and commodity costs have increased, companies like General Mills, Campbell Soup Co., Kellogg Co. and Conagra Brands Inc. have struggled to protect profits by raising prices for products, citing steep competition from discount retailers.

Some consumer-products companies are taking more drastic steps to slash costs to protect thinning profit margins. Kimberly-Clark, which makes Huggies diapers and Kleenex tissues, kicked off a massive restructuring of its operations earlier this year that is expected to deliver annual pretax savings of as much as $550 million by the end of 2021. But the overhaul is projected to be pricey, with total costs reaching as much as $1.9 billion before then.

Those charges weighed on Kimberly-Clark's first-quarter earnings, which were reported Monday, but the company boosted its sales forecast for the year. Shares fell 1.5% Monday. CEO Thomas Mr. Falk said the cost cuts are necessary, along with the development of new products and some stronger pricing, to put the company, and the industry at large, on firmer footing.

Some analysts believe a wave of stock volatility that spurs demand for so-called haven assets could prompt a rebound in consumer-staples shares, which many consider bondlike because of their dividends.

As of the end of March, 33 of 34 companies in the consumer-staples sector had boosted dividend payouts to shareholders, according to data from S&P Dow Jones Indices, with the average yield clocking in at 3%, above the broader S&P 500's average dividend yield of 2.4%.

Still, sectors that investors tend to think of as safety plays -- telecom, real estate and utilities -- have fallen alongside staples to rank as the worst-performing sectors in the S&P 500. Meanwhile, investors have extended bets on technology companies that they believe will be able to deliver faster earnings growth.

And with recent earnings reports pointing to sluggish sales growth among several consumer giants, many anticipate a tough road ahead for the sector.

"It's concerning for these companies," said Charlie Smith, chief investment officer of Fort Pitt Capital Group. "There's just not a lot of inflation in the system and the ability of these consumer-product companies to push pricing just isn't there."

Write to Akane Otani at akane.otani@wsj.com and Michael Wursthorn at Michael.Wursthorn@wsj.com

(END) Dow Jones Newswires

April 25, 2018 05:44 ET (09:44 GMT)

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