Consumer discretionary companies are those providing nonessential goods and services, meaning things and experiences that you want to buy but don't necessarily need to survive. This includes a wide array of sectors such as entertainment, apparel, and restaurants, among several others. Companies operating in this space are particularly exposed to fluctuating consumer spending, but at the same time they enjoy exceptional opportunities for growth and profitability.
When looking for the investment opportunities in consumer discretionary, names such as Disney (NYSE:DIS), Nike (NYSE:NKE), and Chipotle Mexican Grill (NYSE:CMG) stand out as remarkably strong players in their respective industries.
No company comes even close to Disney in the entertainment industry. The company has built a global empire with a big and profitable presence in areas such as movies, TV networks, parks, and merchandising. This breadth allows Disney to profit from its creations via multiple platforms at the same time, which represents an unparalleled advantage in the business.
Disney owns the rights to many of the most popular fictional characters in the industry, from Mickey and Cinderella to Buzz Lightyear and Luke Skywalker, among countless others. The company has built an emotional connection with global consumers across generations, and this advantage makes Disney a unique business.
ESPN is major cash cow that generates nearly 75% of Disney's operating income in the networks division. The network is the undisputed leader in sports, and it wouldn't be feasible for other networks to duplicate the expensive long-term contracts ESPN has signed with major sports leagues and associations in different disciplines around the planet.
Management knows how to translate the company's competitive strengths into growing cash flows and earnings for investors, Disney's financial performance has been remarkably strong over the past several years, and the latest report from the company confirms that the business keeps firing on all cylinders.
Sales during the quarter ended in December grew 9% to $13.4 billion, while earnings per share increased 23% and free cash flows jumped 55% year over year. This is nothing short of spectacular for a company of Disney's size.
Sports superstars such as Michael Jordan, Roger Federer, and Cristiano Ronaldo have many things in common. Amazing talent is one of them, and Nike sponsorship is another one. Nike has invested tons of money through the decades in sponsoring many of the most renowned athletes in the world, and memorable marketing campaigns have made of the Nike swoosh one of the most recognized corporate logos around.
Nike refers to marketing expenses as "demand creation expense" in its financial statements, which is quite an appropriate term in this case. A differentiated brand, a reputation for quality, and a strong focus on innovation are crucial strengths in terms of credibility when it comes to launching new products or entering new markets.
Also, because of its massive scale and superior pricing power, Nike enjoys above-average profitability; gross profit margin was at 45.9% of sales during the quarter ended in February.
The company is rapidly expanding in international markets; local currency sales grew 21% in Western Europe, 17% in Eastern China, and 12% in emerging markets in the last quarter. Also, the Converse brand is an explosive growth driver for Nike, as local currency sales increased 33% year over year.
Chipotle Mexican Grill
Calling Chipotle Mexican Grill a successful restaurant chain would be an understatement. Chipotle is revolutionizing the industry by redefining what consumers expect and demand in the fast-food business. The company's "food with integrity" approach to Mexican cuisine is leading a major boom, yet Chipotle is about much more than organic tacos and burritos.
Chipotle has a unique corporate culture that's quite unusual among restaurant chains. The company offers better salaries and working conditions that the competition, as well as more attractive opportunities for professional development. This difference allows Chipotle to attract, retain, and motivate the best people in the industry, a major positive when it comes to operational efficiency and service quality.
Total sales during the quarter ended in December grew 26.7% to $1.07 billion, on the back of 60 new restaurants and a delicious 16.1% increase in comparable restaurant sales. Earnings per share did even better, jumping by 52% year over year.
Management calculates that it has room for nearly 4,000 restaurants in the U.S. alone, versus 1,783 units as of the end of December. Besides, Chipotle is barely taking its first steps in international markets, so the company is positioned to continue delivering spicy growth over the long term.
Disney, Nike, and Chipotle Mexican Grill are very different companies operating in their own industries and with their individual weaknesses and strengths. However, they have one important element in common; the three companies are world-class businesses offering exceptional quality in the consumer discretionary sector.