Industry Outlooks Diverge within Consumer Products

According to the Federal Reserve, nearly 70% of all U.S. economic activity is generated by consumer spending. According to the latest consumer spending data, which included December of 2018, total consumer spending growth grew 2.8% during the calendar year. This is nearly identical to the latest reading of 2018 U.S. GDP growth of 2.85%, also reported by the Federal Reserve. 

Gardner’s analysis of Wall Street data for the consumer cyclical sector can be generally classified under two industries; the first being Apparel and the second Home Furnishing, Fixtures and Household Products, which will be referred to as “Home Goods.” The financial trends within these two industries over the last three years illustrate very different histories. In particular, the aggregated financial data provided by firms in the Home Goods industries suggests that the industry increased capital expenditures after experiencing an increase in free cash flows. Conversely, in the relatively short time period studied the Apparel industry’s free cash flow position, in general, does not appear to induce a similar change in capital expenditures.

In the 2019 and 2020 consensus forecast of Wall Street equities analysts, Apparel earnings before taxes, interests, depreciation and amortization (EBITDA) growth is projected to slow from its near-30% peak in the third quarter of 2018, slowing to 11.5% at the end of 2019 and then contracted by 3.3% at year-end 2020. This comes after EBITDA experienced a multi-year contraction which only ended in mid-2017. The forecast for EBITDA in 2020 in total, inflation-adjusted dollars is expected to match the levels last experienced in 2013.

By comparison, the Home Goods industry, after experiencing flat to declining profits in 2018, is expected to change course and experience profit growth of 8.5% and 4.1% at the end of 2019 and 2020 respectively. Should these forecasts come true, manufacturers producing for the home goods industry may be in for a welcome increase in customer activity over the next 18-to-24 months.