Why the Great Stock Rotation Is Skipping Consumer Staples

These companies’ uneven performance so far this earnings season helps explain why. While Coca-Cola KO 1.48%increase; green up pointing triangle posted impressive results that demonstrated superior pricing power, others turned in mixed quarterly reports, dragged down in particular by concerns about U.S. consumers. 

Take global food giant Nestlé, which reported results Thursday. Real internal growth, the company’s measure of underlying sales volume, rebounded to grow by 2.2% in the second quarter from a 2.0% contraction in the first quarter. Encouragingly, the recovery in volumes was broad-based across business divisions and geographies.

But investors focused instead on the company’s pricing which, while up 0.6% from a year earlier in the quarter, slowed substantially from a 3.4% increase in the prior period. Nestlé also lowered its forecast for full-year organic sales, a key industry measure that strips out impacts from currency movements, mergers and divestitures, to growth of “at least 3%” from “around 4%” earlier, saying “we have seen pricing come down faster than expected.”

“There is stress in particular at the low end of the income scale in North America, but also in select other geographies. And so people are value-seeking. And hence, promotional intensity has been particularly strong,” Nestlé Chief Executive Mark Schneider said on a conference call with analysts. Nestlé’s Switzerland-traded shares fell 5.1% in response. 

Similarly, Kleenex-maker Kimberly-Clark KMB 0.52%increase; green up pointing triangle on Tuesday reported decent organic sales growth of 4% from a year earlier in the second quarter, driven by a balance of pricing and volume. But that was a tad lower than the 5.1% growth analysts were looking for, according to consensus estimates from VisibleAlpha. And on the company’s conference call, Chief Executive Michael Hsu characterized the promotional environment in the U.S. as back to pre-Covid levels. Kimberly-Clark shares slid 5.7% the day of the earnings. 

There were more positive updates from some. Colgate-Palmolive CL 3.01%increase; green up pointing triangle on Friday reported strong organic sales growth of 9.0% for the quarter, on volume growth of 4.7%—the best since the pandemic surge of 2020—and 4.2% pricing growth. Shares rose 3.0%. Here too, though, there were notes of caution in the U.S., where pricing fell 3.3%. On a conference call, managers said they had pulled back too much on promotions in the second quarter last year, requiring stepped up promotions now. 

Coca-Cola was the strongest of the pack, reporting a 15% increase in second-quarter organic sales. North American volumes were down just 1%, while pricing and sales mix were up 11% on-year. This suggests that the company, more so than peers, remains able to push through price increases despite a cautious consumer, possibly speaking to the strength of its brands. PepsiCo PEP 1.01%increase; green up pointing triangle, by contrast, earlier this month reported a 3% decline in North America beverages volume and only a 1% increase in revenue for the segment, indicating much weaker pricing. Coca-Cola shares didn’t move much after reporting on Tuesday but made steady gains through the week, reaching a record high on Friday. 

Overall, though, the picture is of an industry that is managing to grow volumes globally but with uneven pricing power, particularly among lower-income consumers in the U.S. This somewhat undermines its traditional position in investor portfolios as a sector that does better when times get tough—perhaps because consumers are simply exhausted by higher prices. 

This time around, consumer staples don’t look like much of a safe haven. 

Write to Aaron Back at aaron.back@wsj.com