Bryan Spillane, BofA Securities senior consumer analyst, joins 'The Exchange' to discuss the food stocks and how higher costs are weighing on consumers.

Washington

Shares of major companies like Pepsi and Procter & Gamble are experiencing declines due to higher costs. Pepsi's stock dropped by approximately 5%, while Procter & Gamble saw a decrease of around 4%. Though both companies reported positive revenue, they fell short in earnings and have revised their future outlook due to tariff and spending uncertainties. Cost risks, particularly stemming from tariffs, have proven to be a significant issue impacting earnings and expectations for the near term.

According to Bryan Spillane, a Senior Consumer Analyst at BofA Securities, costs pose a larger risk than previously anticipated for companies like Pepsi and Procter & Gamble. Spillane explains that while there was an initial focus on potential revenue risk, cost-related issues, such as tariffs, were more impactful than expected, significantly influencing negative earnings revisions. However, concerns regarding empty store shelves have not yet become a significant narrative within the current economic context.

The economic environment differs from the early COVID-19 period as companies are now focusing on maintaining prices despite increased costs. Spillane notes that corporations, including those in telecommunications and automotive sectors, are emphasizing price stability in their marketing. This trend reflects a shift as businesses grapple with margin pressures due to limited pricing flexibility amidst historic inflation levels. Despite earnings forecasts lowering, stocks in the consumer staples sector, driven by market flows, have remained relatively stable. Spillane suggests investors exercise caution, as deteriorating fundamentals could pressure these stocks further.



Higher costs weigh on consumers

Welcome back. Shares of Pepsi, that was our mystery chart, down almost 5% today. They did beat on revenue, but they missed on earnings and slashed their outlook on tariff and spending uncertainty. Procter & Gamble, similarly missing on the bottom line, they're down about 4% today. Our next guest expects a period of below-target growth for both of these names, but says there's still one bright spot in his consumer coverage. Joining us for more is Brian Spillane, B of A Securities Senior Consumer Analyst, and to our great chagrin, recently named head of America's Equity Research, Brian, because that wonderful promotion means we can't talk to you anymore. Congratulations. Well, thank you. You got me for a little longer, though. Well, again, it's a big—so you're going to be overseeing all of it, all the research, everything, everybody? Unbelievable, the whole thing, but for the next few months, it's a Bill Russell. I'll play your coach for at least another few months. Excellent. Well, look at J.J. Reddick. I mean, he goes from player to a coach. Anyway, we're getting away from the point. Seriously, congratulations. While we have you, there is much to discuss, and not a lot of it great news for the companies that you specialize in right now. What is the message from these companies' earnings this morning and the lack of outlook? I mean, the biggest concern—I'm just going to cut to the chase—is empty store shelves. Are you getting a whiff of that yet? So that actually hasn't come into today's narrative. I think the biggest sort of incremental headline today between these three stocks is costs are a bigger risk than I think we all anticipated going into today's earnings. There was a lot of focus on revenue risk, but I think cost risk was it. And you talked about tariffs, and it really affected, surprisingly, both, I think, Pepsi and Procter a little bit more than expected. And that is, you know, the reason for the negative earnings revisions. But from a kind of out-of-stock perspective or store shelves, that hasn't really hit the narrative at this point yet. Nor would it be in your sector per se, right? When we're talking about—now, again, I grant there are food imports, packaged food imports from Europe and places like that that could be affected, but we're not really talking about mass-produced American, you know, staple products that would necessarily be the ones that aren't coming in through the port of L.A., right? Correct. No, most of what we're talking about here are like raw material costs or like supply chain-related, but not necessarily like goods just stopping at the border. Exactly. So one of the biggest differences I noticed now versus COVID is the number—I've seen advertisements from Hyundai. I've gotten offers from Verizon. They're saying, we're freezing your prices. We put you, the consumer, first. We're not going to—we didn't hear any messages like that back in 2020, 2021, and 2022. The fact that we're now seeing marketing messaging by companies saying, we are not going to raise price makes me wonder about margin pressure across corporate America. Well, you know, Kelly, it's a great question because we talked about this a few weeks ago. These companies don't have the ability to price anymore, right? We've priced to a historic level of inflation. So the message today was basically, if there's incremental costs, whether it's related to tariffs or something else, it's either going to come from additional cost cutting or it's going to come at the expense of margin pressure. And we saw margin pressure at both Procter and Pepsi today, and we'll likely see it into the next quarter as well. So what does that mean for investors who are hoping consumer staples would be an area of stability? So I think it's a very similar dynamic that we've seen over the last month or so, which is, you know, the stocks have held in relatively well, even though earnings estimates have come down. And that's really a function of the flows, you know, this being sort of a staples market. We have to be very selective from here. I think Dr. Pepper, who does not have negative earnings revision risk, I think is a decent place to hide. But I think these stocks, the fundamentals are decelerating for consumer staples. And I think when we get to a market that's more risk on, you know, I think these stocks will likely be under pressure if fundamentals continue the way they are.

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