Consumer staples have been one of the few sectors to hold steady through the coronavirus crisis.
This group of stocks, made up of companies selling things like packaged food and household products, tends to be recession-proof. This time around, it has demonstrated its defensive positioning once again as consumers flocked to supermarkets to stockpile goods like food, toilet paper, and cleaning products when the pandemic hit, while most other industries saw sales plummet.
With the economy now plunging into a recession and signs that some degree of social distancing is going to be in effect for at least the coming months, consumer staples stocks should continue to outperform the market and provide a degree of safety that few sectors can offer during such an uncertain time. If you're looking to add a few stocks to coronavirus-proof your portfolio, keep reading to see why Clorox (CLX 0.24%)and Dollar General (DG -0.59%) fit the bill. (DG -0.59%)
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A golden age for cleaning products
You only need to visit your local drugstore or supermarket to see that demand for cleaning products has skyrocketed. Products like sanitizing wipes, bleach, and hand sanitizer are often out of stock or in short supply, as cleaning and disinfecting has taken on a special importance during the pandemic. Not surprisingly, Clorox has seen sales surge.
In its third-quarter earnings report, in the January-March period, sales jumped 15%, driven by 18% volume growth, which led to a 31% jump in earnings per share. Cleaning products make up about half of Clorox's revenue, and sales in that category jumped 32% in the quarter and saw a 71% increase in operating earnings. In the international segment, which also includes some cleaning products, organic sales rose 22% and operating profits jumped 50%. That kind of surge is extraordinary from a mature consumer staples company.
Clorox lifted its guidance for the fiscal year, calling for organic sales growth of 6%-8%, up from a previous forecast of flat to 2%. On the bottom line, it now sees EPS of $6.70-$6.90, up from a prior range of $6.10-$6.25.
Clorox's sudden growth is likely to endure for the duration of the pandemic. It could even accelerate, because offices, restaurants, malls, and other public places that open up will need extra cleaning products as clean space will be essential for preventing a rebound in infections and bringing back customers. That will almost certainly drive bumper sales for the company over the coming quarters. Even if the coronavirus is eradicated, habits and fears around the virus could mean that cleaning products sales normalize at a higher level than before.
With the windfall, Clorox could go shopping for an acquisition in a segment that may be struggling, like in beauty or skin care, or find another opportunity as the company has historically grown through acquisitions.
A recession-proof retailer
Dollar General is the nation's largest retail chain by store count, as the discount brand has expanded aggressively in recent years across rural America, adding about 1,000 stores a year. The discount chain has performed consistently well even in a strong economy, but its focus on low prices tends to shine in recessions as consumers trade down, hunt for bargains, and favor small pack sizes. With unemployment spiking and GDP plunging, Dollar General should thrive over the coming months.
When the shutdown orders first started, the retailer said it would hire as many as 50,000 employees to help with the spike in demand as Americans stocked up on essentials like food, paper products, and cleaning supplies. The company acknowledged that the majority of those jobs would be temporary. But its positioning as an essential retailer selling low-priced products with stores within five miles of 75% of the U.S. population sets it up to grab market share during the crisis as non-essential retailers are closed. Consumers don't want to go far from home and are looking for bargains.
Dollar General has not yet reported earnings since the pandemic started, but the company's same-store sales surged during the last recession, rising 9% in 2008 and 9.5% in 2009. The company could see a similar boom in this crisis.
Additionally, with the fallout in the broader retail sector, the company could find some excellent deals on real estate, as there will likely be a significant number of bankruptcies in brick-and-mortar retail. That should help fuel the company's expansion even after the near-term tailwinds from the crisis fade.
