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The consumer environment looks rosy owing to favorable jobs scenario, increased consumer spending, rise in Consumer Confidence Index and an improving economy. However, shifting demographics, changing consumer preference and technology advancements continue to pose threats for the sectors where consumers’ are the main driving force.

Which are the sectors that are impacted the most by this trend? Let’s find out.

Well, one most prominent sector in the lot is Consumer Staples, which deals in essential and non-durable goods that form a part of our daily lives. Products ranging from everyday grocery, food items, beverages, tobacco, and other household essentials generally make up this sector’s business. Notably, highly competitive environment, shift in preference towards organic food products, new store formats and evolving business models are major challenges plaguing the sector.

Consequences of These Headwinds

When discussing the consequences, we can rightly quote the example of the grocery industry, which is a key segment of this sector. The industry has been grappling with intense competition, highly promotional landscape and change in customers’ taste resulting in the increased demand for organic products.

As we all know, competition in the traditional grocery space mainly relates to strengthening franchises and shift to low-priced private label brands. Further, the recent intrusion of e-commerce giant Amazon.com Inc. (AMZN - Free Report) with the acquisition of Whole Foods Market Inc. on Aug 28 has intensified the competition. Following this, Amazon has started slashing the prices of Whole Foods’, giving its brick-and-mortar rivals goose bumps.

Moreover, as quoted earlier, change in consumer tastes to healthy products has significantly altered the fate of the food industry, where the canned products and packaged goods are falling out of customers’ favor. The impact of this trend can be clearly seen in the performance of Campbell Soup Company, which is struggling to find a place in customers’ carts for its canned soup products. This is also true for other categories, including Cereal, which is also witnessing a decline.

Additionally, packaged-food manufacturers are struggling to get the right promotional pacts in place with grocery retailers and other vendors. This has left them scrambling to occupy the center grocery aisle in a store. Some retailers battling for protecting shelf space are Kraft Heinz Co. (KHC - Free Report) , General Mills Inc. (GIS - Free Report) , Kellogg Co. (K - Free Report) , Mondelez International Inc. (MDLZ - Free Report) , and Campbell Soup.

These challenges have left industry players scrambling for options to improve businesses. Apart from protecting shelf space, the food industry is feeling the pressures of some serious price wars, lower market share, diversifying products, and exploring acquisitions and mergers.

Other headwinds like strained margins, high operating expenses, declining volumes, slowing emerging markets growth, uncertain international markets and foreign currency impacts may also hinder growth.

How the Consumer Staples Sector is Placed?

We note that the Consumer Staples sector has been underperforming the S&P 500 market lately. In the last six months, the sector recorded 3.2% growth, a notch below the S&P 500 Index’s growth of 5.2%. However, it carries a Zacks Sector Rank of #7 (out of 16), placing it at the top 44% of the Zacks Classified sectors.



While the sector Rank is encouraging, its dismal performance relative to the S&P 500 Index makes us cautious about placing bets in the sector.

Earnings Trend for Sector Players

The second-quarter earnings season, which marked the second straight quarter of double-digit earnings growth for the S&P 500, is well behind us.

Shedding light on the Consumer Staples sector, the aforementioned challenges surely call for a tough quarterly performance for industry players. We note that many major sector participants came up with dismal earnings for the quarter and slashed their forward outlooks. Further, estimates for these companies declined considerably following the earnings.

Also, as is the general case, share prices of these companies have plunged following the dismal results. These factors considerably reduce the visibility for these stocks to beat estimates in the quarter ahead.

Surely, investing in companies that deliver positive surprises can fetch handsome returns for investors. On the flip side, investors prefer to sideline stocks that have a dismal surprise trend to avoid portfolio mishaps.

Here is the key to any investment portfolio, picking the most lucrative stocks and doing away with stocks that have little visibility.

Consumer Staples Stocks to Avoid After Earnings Slump

Hence, we bring you five stocks from the Consumer Staples sector that have disappointed in the most recent quarter and witnessed decline in share price following the results. We suggest avoiding these stocks, which also carry Zacks Rank #4 (Sell) or 5 (Strong Sell), possess a negative surprise trend and have witnessed downward estimate revisions.

First on the list is Avon Products Inc. (AVP - Free Report) , a global direct-selling beauty company offering cosmetics, fragrances, toiletries, jewelry, and accessories. The company currently has a Zacks Rank #5 and reported negative earnings surprise of 150% in second-quarter 2017. Results for the most recent quarter were primarily impacted by strong comparisons with the prior-year quarter. Another major setback for the company has been weak Active Representatives growth, which is hurting results for the past few quarters. The company has lagged earnings estimates for four consecutive quarters, with an average miss of 90.7%. Additionally, estimate for the current fiscal has declined 55% to 9 cents per share in the last 60 days. Moreover, the stock declined a solid 25.9% since reporting dismal earnings on Aug 3, underperforming the industry’s 1.7% gain.



Campbell Soup Company (CPB - Free Report) , with a Zacks Rank #4 and earnings miss of 5.5% in fourth-quarter fiscal 2017, is also in the red. This worldwide manufacturer and marketer of high-quality, branded convenience food products has lagged the Zacks Consensus Estimate in the last two quarters, reporting an average negative surprise of 1.2% in the trailing four quarters. Much of this debacle could be attributed to a difficult packaged food industry landscape, where sales have been soft due to consumers changing food preferences, evolving shopping trends and tough retail environment. Also, the company expects a tough operating scenario in fiscal 2018, which led to a cautious view. Estimate for the current fiscal has declined 3.7% to $3.10 per share in the last 30 days. Further, the stock has fallen 5% since reporting results on Aug 31, against the industry’s 1.1% upside.



Another stock to avoid is Dean Foods Company (DF - Free Report) , a leading processor and distributor of milk and other dairy products in the United States as well as a leading manufacturer of various specialty food products. The stock has declined 26.1% since posting dismal second-quarter 2017 results on Aug 8, wider than the industry’s fall of 23.9%. Moreover, the company has reported negative earnings surprise in four of the last five quarters, with an average four-quarter miss of 15.2%. The company has been facing a tough retailing on account of fast-evolving consumer trends. Moreover, Dean Foods’ volumes have been under pressure due to stiff competition and macro factors. These factors, along with high raw milk costs led the company to post a negative surprise of 30% in the second quarter. Estimate of 85 cents per share for full-year 2017 has declined 37% in the last 60 days. The company currently carries a Zacks Rank #5.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



Next is B&G Foods Inc. (BGS - Free Report) , the manufacturer, seller and distributor a portfolio of shelf-stable, and frozen food and household products in the United States, Canada, and Puerto Rico. The company delivered a negative earnings surprise of 16.3% in second-quarter 2017, mainly hurt by industry-wide challenges. Further, it lowered adjusted earnings and adjusted EBITDA guidance for 2017. The company has an average negative surprise of 8.1% in the trailing four quarters. Further, estimates for 2017 dipped 1.9% to $2.12 per share in the last 30 days. This Zacks Rank #4 company has declined 3.4% since reporting second-quarter results on Aug 4, underperforming the industry’s 2.6% downside.



Lastly, we would suggest avoiding Spectrum Brands Holdings, Inc. (SPB - Free Report) , with a Zacks Rank #4 and a negative earnings surprise of 10.9% in third-quarter fiscal 2017. The lower-than-expected results were due to lower volumes, foreign currency headwinds and soft sales at personal care and small appliances segments. This consumer products company has reported earnings miss in the last two quarters, with an average negative surprise of 2.7% in the trailing four quarters. Moreover, estimate for the current fiscal has fallen 0.4% to $5.57 per share in the last 30 days. Further, the stock has fallen 14.5% since reporting earnings on Jul 27, compared with the industry’s 5.7% decline



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