3 Consumer Stocks Investors Returned in the First Quarter

Why did investors turn away from Herbalife, SodaStream, and Mattel in the first quarter of 2014? Hint: controversies aplenty.

Apr 2, 2014 at 7:43AM

The first calendar quarter of 2014 proved rough for some consumer-goods companies. The share prices of Herbalife (NYSE:HLF) and Nu Skin (NYSE:NUS) dropped 29% and 40%, respectively, due to investigations by regulators in two countries. SodaStream's (NASDAQ:SODA) 14% share price drop came from a new competitor and a public relations disaster. Mattel (NASDAQ:MAT) shares were down 13% after a poor earnings report and some bizarre Barbie marketing. Were investors right to toss these shopping stocks on the return desk? 

Each of these companies experienced controversy in the first quarter that at least partly explained their dips. What were those nitty-gritty details -- and will the bad times continue in the second quarter? 

Herbalife Shake Mix

Source: Herbalife

Herbalife wavers under scrutiny 
Nu Skin and Herbalife often appear in the same news stories because the nutritional supplement companies both suffer scrutiny because of their multi-level marketing sales models. The concerns started in China where government officials began crafting new rules for MLM companies after a state newspaper accused Nu Skin of operating a pyramid scheme. 

Nu Skin ended up with a fine of $500,000, with $241,000 of that pertaining to individual fines lobbed at six sales representatives. The company got a lower fine than investors had expected, which led to a brief share price rally. However, the scrutiny will continue for MLM companies in China -- and that's Herbalife's largest growth region.

However, while Herbalife hopes to evade Chinese punishment, there's another investigation happening back in the United States. The Federal Trade Commission began a preliminary investigation last month into Herbalife's business operations.Activist investor Bill Ackman has long lobbied for the FTC to investigate what he has loudly called a pyramid scheme. Rival investor Carl Icahn has stepped to the other side of the aisle with a heavy Herbalife investment and five total seats on the board. 

From a financial standpoint, Herbalife delivered solid results during the first calendar quarter. The company's fiscal fourth-quarter report met both the revenue and earnings per share estimates with reported results of $1.3 million and $1.28, respectively. Consensus estimates for the first-quarter report include $1.2 billion in revenue and EPS of $1.29. However, those results won't matter over the long term if business operations are shut down abroad or at home. 

SodaStream's competition brews as controversy bubbles 
SodaStream hired Avengers star Scarlett Johansson as the company's first celebrity spokesperson and the actress starred in a cheeky "banned from airing" Superbowl commercial. However, the partnership took a complicated turn in the press after Johansson's role as an ambassador for Oxfam -- a global poverty and human rights charity -- led to questions about SodaStream's large factory in the controversial West Bank. Johansson stepped down from Oxfam and stayed with SodaStream.

Personal political beliefs aside, SodaStream surely didn't want customers debating the Israeli-Palestinian conflict while brewing up carbonated canisters of cherry cola. Although the West Bank factory has existed for years, the Johansson deal pushed it further into the spotlight. 

That's not the only issue that drove SodaStream shares down in the first quarter. Keurig Green Mountain announced a forthcoming Keurig Cold machine that would step directly on SodaStream's turf. Worse still, Green Mountain signed an exclusive partnership which features Coca-Cola products while SodaStream's stuck with mostly off-brand soda alternatives. 

Mattel makes desperate attempts to save Barbie 
Mattel started the year off with a lackluster fourth-quarter report that included $2.1 billion in revenue and EPS of $1.07 -- both of which missed analysts' estimates.  One of the key segment figures showed that Barbie sales were down 13% worldwide. Mattel followed that news with some rather odd tactics to get Barbie back in the public consciousness. 

Mattel launched a Twitter campaign which featured the hashtag "unapologetic" -- an answer to critics who say that Barbie promotes an unrealistic body image. The phrase was then trumped by Barbie's appearance in the Sports Illustrated Swimsuit Edition, which isn't a top read among the elementary schoolgirl set. It came across as Mattel trying to make Barbie look as edgy as more-popular doll brands such as the company's own Monster High line. However, the attempt will likely fail; Barbie simply isn't edgy. 

Barbie's not Mattel's only faltering product. Fisher Price was also down 13% in the fourth-quarter and Hot Wheels dropped 8%. Two rays of light: American Girl dolls were up 3%, while a segment called other girls brands was up 12%, mostly due to Disney Princess toys.  Analysts expect the first-quarter to stay weak year-over-year with revenue of $954 million and EPS of $0.07.

Foolish final thoughts 
Herbalife has landed in an unenviable position with the crackdown in China and the concurrent FTC investigation, and negative decisions in either region could injure or cripple the business. SodaStream's press nightmare will calm down eventually -- right in time for Keurig's competing machine to hit the market. No matter how hard Mattel tries, Barbie can't become as edgy as Monster High. Expect more rough news for these companies as the year progresses. 

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, Mattel, SodaStream, Twitter, and Walt Disney. The Motley Fool owns shares of Coca-Cola, Mattel, SodaStream, and Walt Disney and has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $37 puts on Coca-Cola, long January 2015 $50 calls on Herbalife, and long January 2016 $57 calls on Herbalife. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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