Editor’s Note: Robert W. Baird & Co. recently released its 2014 Consumer Leisure Outlook examining prospects for the discretionary spending marketplace. The following offers excerpts from the report.
2014 Outlook: 2013 was a banner year for consumer discretionary stocks. Fundamentals are in place for another good year, but further upside will rely on business momentum and nimble trading now that valuations have caught up. We believe a newfound wealth effect will release pent-up demand, especially in later-cycle categories. Meanwhile, inventory is healthy and new products are compelling.
Bullish on affluent consumers. We remain bullish on discretionary spending as the wealth effect releases pent-up demand. Although wages remain depressed, affluent consumers are benefitting from monetary policy aimed at reflating asset values, creating newfound wealth. We expect the newfound wealth to trigger the release of pent-up demand.
Emphasize long-duration assets. We favor late-cycle discretionary categories like boats and motorhomes, where pent-up demand has yet to be released. In essence, it takes more time for negative equity to evaporate on a 15-year boat loan than a five-year car loan.
Cautious on paycheck-to-paycheck consumer. Consumer spending tied just to wages will lag, in our view. The trend mostly applies to our automotive part retail coverage. Baird sees a silver lining in lower gas prices fueled by an energy renaissance in North America.
Three key cycles. In its consumer leisure coverage, Baird emphasizes three cycles: economic, inventory, and product. According to Baird, 2013 was as good as it gets. In keeping with its 2013 outlook Baird sees:
• A better economy released pent-up demand.
• Dealer inventory switched from a destocking trend to a restocking trend.
• Many brands launched fresh products. With an improving economy, balanced inventory, and more new products, we expect another good year fundamentally, but valuations have caught up.