Leisure activities

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The goods and services in the consumer discretionary sector range from small treats to big ticket items. They aren’t really necessary for everyday life and consumers can avoid or delay these purchases. Businesses in the sector are involved with a range of activities, such as fast food, furniture and appliances, vacations, leisure activities and cars. Marketing and branding are important, as firms need to be innovative and stay ahead of competitive while consumers often chase trends. 

Investors should note that this sector’s earnings are sensitive to changes to consumer confidence and are affected by general economic sentiments. Factors such as inflation and employment might strongly influence people’s spending, as well as seasonal events like Christmas or Halloween. For those looking for more stability and insulation against market cycles, shares in the consumer staples could be better suited, as its less affected by changes in levels of disposable incomes.  

From little luxuries at Domino’s Pizza ($DPZ), gifts from Hasbro ($HAS) to weekends away at Marriott International ($MAR), these types of purchases are more likely to be cut ahead of the regular grocery trip to Walmart ($WMT). 

Home Depot ($HD)

With an assortment of building materials, garden items, home improvement and decor products on offer to do-it-yourself and professional customers, Home Depot’s share price is affected by trends in the housing market. They also have equipment rental and installation services on hand. As the home improvement market is a relatively mature industry, property prices, interest rates and housing stock are all factors investors should consider before investing in this stock. 

When considering Q3 2023 earnings, CEO Ted Decker explained that customers are more focused on smaller projects, rather than big-ticket items of over US$1,000. This trend suggests there are cost pressures affecting consumers’ spending. Net sales declined 3% from US$121.5b in Q3 2022 to US$117.8b in Q3 2023, while sales per square foot of retail space fell from US$646.81 to US$623.71 over the same period. The firm has benefitted from lower product and transport costs by improving their inventories. 

Inventory has been helped by higher online transactions, which accounted for nearly 50% of store orders in the latest quarter. Home Depot is trying to establish a presence in the US$475b for professional builders and renovators. With the share price falling 4% over the year to 29 November 2023, this could be a good entry for investors who are bullish about this growth strategy.

Starbucks Corporation ($SBUX)

Starbucks sells a variety of beverages, licensings its trademarks through stores, grocery and food services. Alongside its flagship coffee brand, the business also roasts coffee. Annual net revenues increased 12% to a high of US$36b to the end of Q4 as at 30 October 2023, with the firm managing to grow the average sale amount 5% and transactions by 3%. An expansion of operating margins from 14.3% to 16.3% over the same period was another positive result. 

Increasing this measure from 14.2% to 18.2% in the latest quarter through more efficient operations and pricing should also interest investors looking for growth opportunities. Starbucks is leveraging its brand through a loyalty program, with 90 day active members showing annual growth of 14% to reach 32.6 million in the U.S. This set up could prove particularly valuable for consumers feeling cost pressures and encourages repeat purchases for small treats. 

Starbucks’ has been working on having complementary products, such as apple and pumpkin flavoured beverages, but also needs to remain mindful that these options don’t compete with each other. While they’ve managed to diversify their products, the firm still aims to do the same with geographies. Around 74% of revenues come from the U.S. and investors who worried about their expansion in China might want to avoid the stock. 

Booking Holdings ($BKNG)

The firm offers a range of travel services that enable consumers to reserve accommodations, transport and experiences. It has a strong presence in the sector through brands including, Booking.com, priceline.com and agoda.com, KAYAK, Rentalcars.com and OpenTable. Booking has benefitted from the demand for travel rebounding strongly since the COVID-19 pandemic and the share price has experience annual growth of 53% to 29 November 2023. 

Gross travel booking increased 24% to US$39.8b in Q3 2024 compared to the previous quarter. This was supported by high levels of travel during the northern hemisphere summer,  investors should note that Booking’s revenues are impacted by seasonality and events such as Christmas. Their focus is on providing a more integrated experience to customers and keep them captive across their platform. Booking still needs to work with partners and if mishaps such as delays in payments to these parties in July 2023 occur again, there could be longer term damage. 

While Booking does expect fixed expenses to increase over the next year, the firm also forecasts growth of 20% in gross booking for the same period. However, investors should consider whether this trend is sustainable before investing in the stock, as consumer budgets are under pressure amidst rising inflation and the number of delayed vacations is currently likely much lower than the previous two years. 

Recreational spending

There are several ETF options for investors who want to invest in the consumer discretionary sector generally, rather than looking for a specific stock. The Vanguard Consumer Discretionary ETF ($VCR) is for investors looking to gain exposure to small, medium and large-cap U.S. firms in the sector. This ETF has the same expense ratio of 0.10%, as Consumer Discretionary Select Sector SPDR ETF ($XLY) which focuses on the consumer discretionary companies in the S&P 500 index. 

For both these ETFs, Amazon ($AMZN) is the largest holding due to high market cap and accounts for around 24% of the total weighting as at 31 October 2023. Tesla ($TSLA) is the second greatest with over 10%. For investors who want less exposure to these specific business, the Invesco S&P 500 Equal Weight Consumer Discretionary ETF ($RSPD) is a better choice as the weighting of its holdings are adjusted to all be equal, rather than reflect their size by market cap.  Investors wanting to access stocks outside of the U.S. should look to the Global Consumer Discretionary iShares ($RXI). The geographic breakdown of holdings is this ETF was around 57% in the U.S., 13% in Japan, 6% in both China and France. Investors should also keep in mind that even though a firm is listed in the U.S., those such as McDonalds ($MCD) and Nike ($NKE) may earn a significant proportion of revenues from other nations.