Slower sales ahead for consumer goods sector

PETALING JAYA: Most consumer-related companies, particularly retail ones, are expected to post weaker results in the second quarter of this year(2Q25), according to CIMB Research.

The research house, which covers 13 consumer stocks, said the poor earnings outlook will come on the back of the absence of festivities that lead to weaker demand and higher operating costs.

“We expect the consumer sector to record weaker year-on-year (y-o-y) and quarter-on-quarter results in 2Q25.

“Discretionary-based companies are anticipated to be particularly affected by lower sales in the quarter due to the front-loading of consumer purchases ahead of the earlier timing of Hari Raya festivities this year, with those festive-driven sales having been fully captured in 1Q25.

“We also expect consumer companies to incur the full quarterly impact of higher staff costs stemming from the rise of the minimum wage to RM1,700 a month from RM1,500 that came into effect in February.

“However, we believe consumer names are likely to mitigate this impact by enhancing cost control and leveraging the stronger ringgit which will lead to lower import costs,” CIMB Research said.

The weak outlook follows the recently concluded 1Q earnings season where there were “more misses than beats”, the research house said.

Among the consumer stocks under CIMB Research’s coverage, eight reported 1Q25 results that met expectations, one outperformed and four missed estimates.

The sole solid performance was by Padini Holdings Bhd, mainly driven by better-than-expected sales from robust festive demand and consumers opting for more affordable alternatives.

The bulk of companies that posted earnings misses in 1Q25 were affected by lower-than-expected sales, the impact of boycotts associated with the Israel-Palestine war, and higher operating costs.

In 1Q25, on a cumulative basis, consumer staple stocks recorded revenue growth of 3.9% y-o-y, while core net profit dipped 5.8% y-o-y.

Among consumer staple stocks, QL Resources Bhd, 99 Speed Mart Retail Holdings Bhd and Farm Fresh Bhd posted better y-o-y results for 1Q25, with only Nestle (M) Bhd and Fraser & Neave Holdings Bhd bucking the trend.

As for consumer discretionary, the sub-sector recorded 19.9% y-o-y growth in core net profit on an aggregate basis in 1Q25.

This was mainly supported by festive-driven demand as both Chinese New Year and Hari Raya fell within the quarter this year.

A favourable ringgit-renmimbi exchange rate also helped ease operating costs for companies that import goods from China, partly offsetting the impact of the minimum wage hike.

Looking ahead to the second half of this year (2H25), CIMB Research expects a more subdued performance compared with 1H25.

This is owing to the lack of festivities during the period and more cautious consumer spending patterns amid global economic uncertainty as well as government plans to rationalise subsidies in 2H25.

“While we expect higher wages will support consumer spending, we believe that consumers will prioritise daily necessities over discretionary-based spending.

“In terms of margins, we foresee downside pressure from rising input costs, inflationary pressures, and higher employee costs.

“However, we believe that most consumer companies have raised or are planning to raise their selling prices to pass on the recent cost increases, in addition to receiving some margin relief from the recent strengthening of the ringgit.

“We believe that consumer companies will continue to focus on improving overall cost control efforts to mitigate these cost pressures”

CIMB Research maintained its “neutral” call on the consumer sector, pointing out that current valuations are fair.

Its top picks are 99 Speedmart, Farm Fresh and Padini.

It said valuations are expected to be supported given the inelastic demand for staple goods and supportive government initiatives.

“Within the sector, we recommend investors focus on consumer companies that benefit from inelastic demand, consumers looking for more affordable options, and those that target the mass-market segment,” the research house added.