With a little over three months left to the year, UBS names its top picks within consumer subsectors and which are best positioned to outperform for the remainder of the year by taking into consideration the dynamic consumer environment and shifting discretionary spending, along with the interest rate landscape that will have an impactful relationship to a stock’s performance.
Within the Beverage, Household & Personal Care products subsector, recent commentary from companies within this category alluded to incremental signs of strain in the form of value-seeking behavior from consumers and increased promotional pricing. UBS analyst Dennis Geiger’s research indicates investors rewarding names where there is visibility to top-line growth and/or an inflection in volume performance. For that reason, Colgate (NYSE:CL) is Geiger’s top pick for its best-in-class top-line growth and sees the company delivering organic sales growth at the mid-to-high end of its +3-5% long-term algorithm on a sustainable basis.
In the Leisure category, the cruise industry’s above-average growth trend is showing little signs of easing even as the gap to land-based hotel prices in the U.S. is still “meaningfully” wider than it was in 2019. While the cruise industry will always have a gap to hotel rates without business travel to support pricing, Geiger thinks there is no fundamental reason why that gap should be significantly wider in 2024 than in 2019, especially since the growth in the U.S. hotel rate has been driven by business demand. Royal Caribbean (NYSE:RCL) stands out among cruise operators with 2025 bookings and pricings up from 2024, four new ships added to its fleet, and the 2026 opening of the Royal Beach Club in Cozumel, Mexico all adding to the appeal of the company among travelers. “We believe RCL is able to drive demand substantially above 2019 levels with a record booked position for 2024,” Geiger says, forecasting net yield to be up 3% year-over-year in 2024 and 2025.
For Restaurants, ongoing traffic softness and price sensitivity encourages a cautious outlook for the category in the second half of the year. However, higher quality, defensive brands with slower growth in the first half of 2024 could be setup for a better second half with the contribution of initiatives, potential trade-down benefits and attractive valuations. As one of the few restaurants with solidly positive traffic and same store sales, Domino’s Pizza (NYSE:DPZ) is UBS’s top pick, with an opportunity for multiple expansion given the recent pullback in shares (-25% since June).
Companies that have frequent interactions with their customers and alternative profit streams can thrive in a slowing consumer environment, evidenced by outperformance by Walmart (NYSE:WMT) and Costco (NASDAQ:COST) in the Food Retailers category. Target’s (NYSE:TGT) recently announced price reductions on grocery items will increase traffic while also freeing up shoppers’ funds for more discretionary items. And even with promotional pricing, Target’s (TGT) margins should improve from a favorable product mix, upside potential from its private label offerings, and cost optimization plans.
Certain categories within Retailing Broadlines & Hardlines outside of everyday consumables remain pressured, especially housing-related and interest rate sensitive stocks. Ulta’s (NASDAQ:ULTA) stock seems to priced to recent market share pressures, down 34% over the last 6 months, which makes it Geiger’s top pick in the group, as risk/reward skews “significantly” to the upside, even as the stock seems to reflect macro pressures. “Our take is that Ulta can execute through recent performance issues, and as sales growth outlook improves, its multiple should see upward pressure.”
Back-to-school consumer spending in the U.S. is faring better than initially anticipated, Geiger’s research shows, with consumers becoming more selective with their purchases and willing to pay a premium for only what they deem to be the most “quality” brands. At the same time, macro pressures are increasingly weighing on consumer spending in China, while in the U.S. wholesale partners are cautiously planning orders in the second half. Within the Retailing Department Stores & Specialty Softlines category, UBS names On Holdings (NYSE:ONON) as a top pick. Seen as mainly a running shoe brand, the market has yet to appreciate the brand’s potential to address a larger market. Geiger forecasts ONON reaching a 43% 5-yr EPS CAGR and expects strong growth to continue from there.
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