Consumer Discretionary vs Staples - FLT, APE, CGC, RFG

  • Feb 27, 2020 AEDT
  • Team Kalkine
Consumer Discretionary vs Staples - FLT, APE, CGC, RFG

Investors are often confused whether to invest in consumer discretionary or consumer staples stocks. In order to understand whether to invest heavily or lightly in either of these category, one must have clear idea about these stocks.

Consumer discretionary stocks are those companies which provide goods or services that are considered non-essential by consumers like durable goods, apparel, entertainment and leisure, and automobiles. On the other side, Consumer staples stocks are those companies which produce items for everyday use like food, beverages, hygiene products and many more.

Investment in either of these categories requires a careful study of different factors. Like for Consumer discretionary stock, one can look for trading climate in which the products of that discretionary stock is being traded in. To understand this further, let’s take an example of Flight Centre Travel Group Limited (ASX: FLT), a leading leisure and corporate travel service provider which comes under the category of consumer discretionary stocks. Travel management stocks are currently operating in challenging trading climate mainly due to the recent outbreak of Coronavirus, Brexit, US-China trade and many more factors.

FLT’s H1FY20 Results

In its recently released half-year results, FLT reported that despite the difficult trading climate it delivered record sales at accelerated growth rates. At 11.2%, the 1H TTV growth rate was FLT’s strongest for the period since FY16, as the company delivered record TTV across all geographic segments and in all countries, with the exception of Greater China.

FLT’s 1H TTV growth was underpinned by 34% growth in Asia, 20% growth in EMEA, including a strong contribution from the acquired FCM France and Switzerland business, 15% growth in the Americas; and 6% growth in Australia/New Zealand, where FLT has high market penetration. Despite this, the company’s underlying profit of $102.7million was lower than the prior year.

While providing the update on Coronavirus or COVID-19, the company informed that its Greater China and Singapore corporate businesses have been greatly affected due to the Chinese inbound and outbound travel shutdowns, as a results of which the company has advised that it has become difficult for it to achieve its FY20 guidance of an underlying PBT between $310million and $350 million.

APE operating in Challenging environment

AP Eagers Limited (ASX: APE) which is involved in the sale new and used motor vehicles, the distribution of parts, accessories, car care products, is one of the popular consumer discretionary stocks of Australia. For quite some time, the company has been operating in challenging conditions which include Tighter credit availability (cyclical), low consumer confidence and retail under pressure.

According to Federal Chamber of Automotive Industry statistics, Australia’s new motor vehicle sales decreased by -7.8% in 2019 as compared to 2018. The decline in new vehicles sales for the month of December 2019 on pcp represented the 21st consecutive monthly decline in new vehicle sales on pcp. The challenging market conditions were reflected across the Australian industry, with every State recording a decline on pcp. The larger markets of Queensland, New South Wales and Victoria, recorded sales declines on the pcp of 7.2%, 8.4% and 8.7% respectively. The remaining markets also recorded a decline on the pcp, with South Australia and Western Australia down 5.4%, Tasmania down 2.3%, Northern Territory down 16.0% and Australian Capital Territory down 11.7%.

Despite this, the company believe that it is well- positioned to benefit from industry changes in the medium to long term. Last year was a year of transformation for AP Eagers as it successfully completed the merger of its business with AHG to create a leading, national automotive group.

The company has released its 2019 results today. For the year, the company reported Underlying Operating Profit Before Tax of $100.4 million, down 3.0% on the prior corresponding period (pcp). The results include the consolidation of Automotive Holdings Group Limited (AHG) from 19 August 2019, the date on which the Group’s ownership interest in AHG exceeded 50% following the offer being declared unconditional on 16 August 2019. APE achieved 100% ownership of AHG on 24 October. AHG’s operations contributed $17.6 million to the consolidated underlying operating profit before tax for the four months ended 31 December 2019.

Let us now understand more about consumer staples stocks by taking few examples.

Costa Group Holdings’s FY19 Results

Australia’s leading grower and marketer of fresh fruit and vegetables, Costa Group Holdings Limited (ASX: CGC), has released its 2019 full year results today. For the full year, the company reported revenue in excess of $1.0 billion, up 5.8% on the prior period with Statutory NPAT of $33.8 million loss, inclusive of material items and amortisation of intangibles. The revenue growth was led by new Colignan farm sales and increased table grape marketing volume.

The company’s initial trading into CY20 has been positive till now. The pricing levels have improved considerably across most categories, particularly berries and mushrooms. The company remains focussed on delivering value accretive growth, however given the industry’s inherent forecasting challenges, the company intends to transition to qualitative earnings guidance for earnings periods commencing CY21.

Retail Food Group Limited’s Strong Half year Results

Global food and beverage company, Retail Food Group Limited (ASX: RFG) has also released its 1HFY20 results today wherein it reported underlying EBITDA of $31.7 million up 32.7% increase on pcp and Statutory EBITDA of $50.1 million, an improvement of 144.5% on pcp.

The results reflected growing traction derived from turnaround initiatives commenced during FY19, in particular, the company’s capital restructure, completed in December 2019, addressed the debt burden which represented a major threat to the Company’s future, whilst also presenting an opportunity for the Group to continue to harness the underlying value of its franchise network and enhance franchisee performance. Following the release of the results, the stock witnessed an increase of 4% on ASX (as at AEDT 1:07 PM).

The above-mentioned stocks somewhat demonstrate the current scenario of various consumer discretionary and consumer staples sectors. In order to have a better understanding of both these sectors, one must carefully study the different factors which are directly and indirectly affecting the stocks belonging to either of these categories.

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