For many years, fast-moving consumer goods company PZ Cussons (LSE: PZC) was the very embodiment of what a defensive, cash-generating, dividend-growing firm looks like. We investors smugly stashed the firm’s shares into our long-term, buy-and-forget portfolios confident in the assumption that dividends would continue to grow and the share price would likely be much higher decades down the line.
Difficult trading
Yet this morning, the firm issued a – wait for it – profit warning. What! That’s not supposed to happen. As I write this, the shares are around 15% down. The question now is, should we fill our boots with this hitherto unassailable stock at this new ‘bargain’ price? Or does the whole business model come into question? Maybe this is a warning sign that the floor has given way beneath the entire branded fast-moving consumer goods sector in a similar manner to the way that other previously cherished defensive sector, the supermarkets, collapsed.
The update covers trading for the current year due to end on 31 May. Back in January with the interim results, the firm said that trading conditions in the UK washing and bathing division had been tough. Meanwhile, profitability in Africa had been significantly impacted in the Nutricima milk business by competitor pricing. Electricals had also been hit by reduced consumer discretionary spending. Today, the firm tells us that those tough trading conditions have continued and profit before tax for the full year will “fall short of expectations”, down £80m to £85m. To put that in perspective, pre-tax profit for the year to May 2017 came in at £88m, so City analysts’ expectations of growth to £98m or so this year have been quashed and instead, earnings will decline.
Challenging assumptions
At this point, I think we are looking at a setback rather than a disaster. This isn’t the first time we’ve seen the company’s profits decline year-on-year. But this is one of the stock’s biggest-ever one-day declines and moves the share-price retreat to around 37% since July 2017. Movements like that should be noted. So what is the stock market trying to tell us?
In fairness, the firm said today that results in its other markets remain “robust” and the outcomes in Australia, Indonesia and in the beauty division are ahead of the prior year. However, PZ Cussons has shifted into turnaround-mode saying: “A number of initiatives are underway to ensure the Group returns to profitable growth for the following year.”
Worryingly though, sales are down in the UK washing and bathing division, which the firm puts down to “consumer caution across all retail channels caused by economic uncertainty and inflation outstripping wage growth.” It’s a similar story in Nigeria with cash-strapped consumers turning to cheaper goods from PZ Cusson’s competition.
This really does challenge my assumptions about branded fast-moving consumer goods companies. Previously, I’d taken it for granted that sales would hold up whatever the economic weather because of brand strength and the ‘essential’ nature of the products. The thought of a consumer giant such as PZ Cuzzons cost-cutting and fire-fighting in the face of stiff competition and weak markets makes me re-assess the case for investing, and I’m in no hurry to buy the firm’s shares now.
