Wow, safety costs an awful lot. That's all I could think about as I heard the big guide-down delivered yesterday by the chief operating officer of General Mills (GIS) at the annual Barclays Global Consumer Staples Conference.
Just a chilling series of words about a missed quarter which, a month ago, looked like it was in the bag.
It's not often that you see a stock like Mills drop three points or 4% in one day's session. This is a company of the highest quality, which usually has a very good hand on its own destiny. It's been a steady-as-she-goes rally machine for ages.
But it sure wasn't this time, as it took down August guidance because of the competition to a crucial initiative of the company: expanding yogurt sales. It's a reminder of just how dog-eat-dog anything sold in the supermarket is right now; natural, organic, packaged or fresh or anything else in that crucial aisle battleground.
Who's disrupting things? No names were discussed by Jeff Harmening, but it looks like Danone (DANOY) in there, taking share and taking names, but taking no prisoners. And it could only get worse now that the French powerhouse has purchased WhiteWave Foods (WWAV) , a natural and organic maker of yogurt that's been gaining in shelf space in the dairy aisle for several years now.
I was wondering when the pressures on the earnings of all supermarkets would get to these consumer packaged goods stocks, because in the end the packaged goods companies have moved so much in the last few years that their yields are now meager. These bond equivalents have been flying as the Fed keeps rates down, even as their customers, the supermarkets, keep getting trashed. Witness yesterday's thrashing dealt to Sprouts Farmers Market (SFM) , one that spilled over to Whole Foods (WFM) and Kroger (KR) , all with hideous declines to their stocks during the session.
It was only a matter of time that they got to all the food stocks, when you consider the startling decline in the stock of Campbell's Soup (CPB) after that last, subpar quarter. That stock has now lost 10 points in two months; 10 points is a huge hit to a food stock off of one quarter's weakness, especially because it had been among the best performers in the group for ages.
It's telling that the stock usually had been protected by a bountiful dividend, but it had run so much that the yield's still puny and hardly the trampoline that it once served as. Campbell's, to be sure, wasn't just the equivalent of a bond. It has also rallied on takeover talk and a false belief that its business was more immune to price cutting than any other in the space.
It's not like either Campbell's nor General Mills are slug companies. Both have moved to do much more in the natural and organic space, which had been where the growth was. But, guess what, so the private label guys, notably Tree House, have moved in aggressively too, with cheaper, store-branded, merchandise.
You can bet that when the accounting mystery of Hain (HAIN) is cleared up you are going to see that it, too, has been hurt by private label because it hasn't spent enough money defending its brands. Too much inventory, too little shelf space at the ultimate distributor.
How bad is it out there? This quarter they got to JM Smucker (SJM) , which had been the most reliable in the cohort, because of a price war in what had been one of the strongest aisles in the supermarket: pet food. That was a sucker punch quarter, for certain.
In the end the consumer's gotten even more frugal, while the supermarkets are trying to make as much as they can by pitting everyone against each other and there's been unprecedented food price deflation. Think of the companies battling on price for the consumer's business: Target's (TGT) hurting and it doesn't want to lose share to Walmart (WMT) , while the dollar stores are trying to underbid Walmart on all things food these days, including freezer space.
Costco's (COST) caught in the same vice, despite its lucrative club program. Oh, and of course, Amazon's (AMZN) in there, beating everyone to death in the non-produce category and wants, desperately, to move into the same-day produce delivery business.
And, yes, the deflation in food is a dark hole that that all investors are just waking up to.
If you are in any of these stocks, whether it be Kellogg's (K) or ConAgra (CAG) or Church & Dwight (CHD) or even Kimberly Clark (KMB) or Clorox (CLX) , you have to have one finger on the trigger. We even sold one of my faves, Kraft-Heinz (KHC) for ActionAlertsPlus.com after a nice gain, because we didn't see the growth case going forward.
This safety group may prove to be the most vulnerable out there at the moment, until the yields get to be more supported and the takeover chatter ends.
Only then is it safe to be overweight in what's become a very treacherous segment of the supermarket and the market as a whole.
