Inflation may be under control, but soaring prices month after month, higher interest rates and ballooning debt are wreaking havoc on household finances. Anecdotes shared on retailer conference calls paint a picture of a more discerning and cautious shopper. At the lower end of the market, things are particularly tight. Dollar General said sales patterns at its stores suggest its core consumers – households making less than $35,000 a year – will run out of cash by the end of the month. In addition, the retailer’s survey data shows that about 30% of customers have maxed out at least one credit card, and a quarter of customers expect to be unable to make payments in the next six months. Wall Street survey data supports this view and suggests that consumers will seek to cut their budgets. Switching to store brands is one solution. Mizuho said in an August consumer survey that 36% of consumers surveyed planned to buy more private-label products in the next six months, the highest level in the survey. That’s good news for retailers like Walmart and Costco that invest heavily in their store brands. While TreeHouse Foods, a pure-play maker of private-label products, might be considered a way to ride on this trend, the stock has been underperforming. Recently, the company’s stock price turned positive for the year, but analysts remain pessimistic, with most giving it a hold rating. Additionally, the average price target implies a 4% downside potential for the stock. Mizuho Food Industry analyst John Baumgartner, who has a neutral rating on TreeHouse, said the company’s performance has been very inconsistent. He explained that TreeHouse’s sales depend on demand from grocery stores, which may from time to time promote national brands instead of store brands, disrupting TreeHouse’s plans. THS 1Y Mountain TreeHouse Foods stock over the past year. But the company is trying to gain as much control as possible. It is cutting costs and deleveraging after years of trading. It also exited low-growth and low-margin categories. When Baumgartner initiated his rating on the stock in June, he said TreeHouse was “on the strongest growth path in its 20-year history.” But he said it still had to prove itself because “downside risks to growth are real.” Flexible Pricing Power Investors should consider which branded food manufacturers might be hit by consumer price cuts. Baumgartner considers candy maker Hershey and BellRing Brands, owner of Premier Protein and PowerBar, to be the two companies he covers that are least affected by store brands. Wall Street has mixed feelings about Hershey. The stock closed about 1% above its average price target on Friday, according to FactSet data. The company’s shares fell more than 2% in August after it lowered its outlook for 2024 due to a weak second quarter. But the stock has clawed back its losses in recent days as technology stocks tumbled. Producers of Reese’s and Kit Kat have been hurt by rising cocoa costs. While recent price increases have softened the blow, they haven’t been enough to completely offset the pressure. Stifel analyst Matthew Smith has a neutral rating on Hershey’s stock but describes his bias as “positive” because he expects Hershey to benefit from cost-savings initiatives and higher sales next year. Smith wrote in a research note after Hershey: “Hershey’s pricing power differentiates the company and its category from its food peers, providing the potential for differentiated growth going forward. We believe the category will continue to perform well.” Level of resilience. It’s this pricing power that has protected it from store brands cannibalizing its market share, said Baumgartner, who has rated the stock as outperform since January. The stock is up less than 2% since then, but he expects BellRing to trade at a premium to peers because the company is still in the early stages of growth. His price target of $72 is nearly up from Friday’s closing price. 28%, the highest price on Wall Street. (By comparison, the consensus price target of $46.79 is just 11% above where it currently trades, according to FactSet.) BRBR 1Y mountain Bellring Brands Stock Price over the past year BellRing Fiscal Year 2025 Sales growth is expected to be between 10% and 12%. Mizuho said the company continues to increase pricing for its Premier brand at a mid-single-digit rate. Baumgartner said investors did not realize the potential of the nutritional supplement category. He expects annual sales in the category to grow at a mid- to high-single-digit rate over the next five years. Some of that growth will come from entering new retail channels, but the company is benefiting from consumers adopting new habits. , such as having a protein shake with breakfast instead of munching on carbohydrate-rich cereal. There’s also potential for more product innovation, he said: “We think BRBR is one of the best pure organic growth stories in the food industry. One, and there are potential benefits from mergers and acquisitions as the category likely consolidates. It doesn’t hurt that the company’s name has emerged as a potential beneficiary of the increasing use of GLP-1 drugs like Ozempic, Wegovy and Zepbound. Patients taking these weight-loss drugs are advised to increase their protein consumption to prevent muscle loss. Protein Bars and shakes are a quick and easy way to do this. On the other hand, certain food categories are more vulnerable to private label erosion, such as coffee and cheese, which Baumgartner sells. Natural and organic brands like Garden of Eatin’, Earth’s Best and Yves Veggie Cuisine are rated a buy by about a third of analysts. Shares of Hain are down 23% so far this year. .Walmart’s “bettergoods” retailer focuses private label innovation on natural and organic food aisles. This includes not only Whole Foods’ 365, but also Safeway’s O Organics brand and Kroger’s Simple Truth. Earlier this year, Walmart launched BetterGoods, a store brand that sells trendy foods and products that are plant-based or free of ingredients like gluten or antibiotics. Walmart said demand for its store brands increased during its fiscal second quarter, helped by bettergoods. Analysts say the brand, which includes products such as black truffle cream and roast beef patties, is helping the retailer gain share among higher-income consumers. Analysts are extremely optimistic about Walmart stock’s performance so far this year, with 86% rating the stock a “buy” or “outperform,” according to FactSet. Shares are up more than 45% so far this year. Consultancy Kearney recently conducted a study on private label brands with market researcher Nielsen’s NIQ and found that private label brands are gaining market share in a number of categories, particularly salty snacks and deli meats. This trend is driven by higher-income consumers and Gen Z shoppers. Retailers’ investment in private label appears to be paying off because it is becoming a differentiator, said Katherine Black, a partner in Kearney’s food, drug and mass-market retail practice. More than half of consumers say store brands help decide where they will shop, said Black, the study’s lead author. She predicts that by 2030, this trend will grow further and influence the decisions of 60% of shoppers. This has helped fuel the rise of upstart brands, which Black says have become popular seemingly overnight. People are also eager to buy organic products, but organic products can be expensive, and store brands help make these products more accessible. TD Cowen analyst Oliver Chen said private label programs are increasingly important for retailers because they help them become more competitive, build loyalty, provide value and respond to “the speed of change.” Consumers discover new trends so quickly, he said, that retailers need to work hard to prevent being caught off guard when behavior shifts. Cowen sees private labels as a way for shoppers to practice “customized moderation,” in which they scrimp on some items in order to splurge on others. Walmart’s strong association with value makes the stock one of the company’s top picks for the fall. Bettergoods is one of the “more successful” private brands Walmart has tried, Chen said, calling it “artisan, but approachable.” “Consumers want to be smart shoppers,” he said, and store brands with “sharp price points” can help achieve that goal.
These stocks could rise as consumers shift to cheaper private label brands | Real Time Headlines
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