CIBCEQUITY RESEARCH
April 4, 2022 Industry Update
CIBC Retail & Consumer Conference Recap
Expanding On Conference Takeaways, Themes & Implications
Our Conclusion
We recently hosted our 25th Annual Retail and Consumer Conference.
Consumer companies have navigated the immense challenges of the last
two years with impressive consistency, and flexed their resiliency muscle.
But there is no easing in sight, and the conference highlighted myriad
challenges: elevated – and continuing – inflation, unreliable supply chains,
interest rates on the move, sharply higher fuel prices, shifting consumer
preferences, and the unknown effects of Russia’s invasion of Ukraine.
With the ongoing and arguably greater uncertainty, we prefer retailers over
manufacturers and generally favour Staples over Discretionary. Valuations
reflect this stability premium, though we see select opportunities. Our
favoured names are L (and WN), ATZ, PET, JWEL, GDI and PRMW.
Key Points
Reasonable Pricing Power Across The Board: More than half our
coverage universe increased GM% Y/Y last quarter, when costs were at their
highest. This is an encouraging sign but costs continue to rise and more
action is needed. Clearly, brand relevance and pricing power are in the
spotlight. Some companies are leveraging fixed costs with growth, but a few
stand out for their pricing power (notably the grocers, ZZZ and GOOS). The
war against Ukraine holds potential to amplify food inflation; in that context,
we prefer food retailers to food producers.
Supply Chain Continues To Be Tested: Supply chains have been in focus
throughout the pandemic, though up until recently conditions were
stabilizing. The topic is gaining in importance again as China continues to
attempt its “zero-COVID” policy. Large port cities have largely been shut
down for brief periods of time, and reports suggest port congestion is as bad
as it has been, and shipping costs are rising again. However, consumer
businesses successfully managed this issue in 2021, and we anticipate the
lessons learned from that exercise will mitigate impacts this time as well.
Those with local suppliers and in-sourced supply chains will be best
positioned (we highlight GDI, ZZZ, GIL and the grocers).
Minimal Direct Exposure To Russia, But Commodities Exacerbate
Challenges: Just five of our companies under coverage generate any sales
from Russia, and of those five none has greater than 4%. But, the
significance of Russia and Ukraine in certain commodities – chiefly wheat,
corn and fertilizers – creates uncertainty for food inflation as a result of those
commodities’ importance in animal feed and the farming process.
Valuation Paints Mixed Picture: Staples are typically above historical
averages while Discretionary names are below, potentially a reflection of
investors projecting downward revisions for Discretionary. Valuation looks
particularly discounted on DOO, GIL, PET, QSR, and ZZZ