Group 3:XiaoLong CaoJessleen DhaliwalTamir GantumurLing Yee WongJefferson YeRichard Liu

Consumer Discretionary Sector

What is Consumer Discretionary:

Consumer Discretionary is a sector of the economy. Companies in this sector produce

and sell nonessential goods and services for the public. Types of Companies in this sector

include automotive, household durable goods, textiles & apparel, leisure equipment, media

production and services, and consumer retailing and services. Some examples of the largest

companies: McDonald's, Walt Disney, Amazon.com and Ford Motor Co.

As we all know, the typical business cycle has four phases: Early-cycle phase, Mid-cycle

phase, Late-cycle phase and Recession phase. In the Early-cycle phase, consumer discretionary

would benefit from a low interest rates because it is an interest-rate-sensitive sector. So normally,

economic recovery tends to make companies in this sector perform well. In mid-cycle phase,

consumer discretionary has still performed well. Some companies could see a peak in demand

for product or services. But a shift has often taken place during this time. After the peak, less

demand and much more supply make companies in this sector have less and less profit in late-

cycle phase. Finally, companies in consumer discretionary sector would meet a big crisis and

have typically underperformed the broader market during Recession phase. All in all, this sector

performs better when the economy is doing well.

What is going on in Consumer Discretionary:

In this past year, Consumer Discretionary still hasn’t rebounded from the recession of

2008. Consumers are not spending on these companies even during a bullish market. In a year to

date look at XLY, which is an ETF that reflects the Consumer Discretionary market movement

showed that XLY has repeatedly dipped below its 50 day moving average. XLY has also dipped

down into its 200 day moving average in April of this year and also touched the 200-day moving

average in May. Consumer Staples is outperforming Consumer Discretionary by 1.26 points, this

signifies that consumers are still weary of the economy and would like to invest in items with an

inelastic demand. The Textile and Apparel industry in a year to date comparison has been down

by 4.28%. Their biggest gainer this year was Skechers, Under Armour, Cherokee, and Perry

Ellis. Its biggest losers were Quiksilver, Lululemon, American Apparel and Coach. The

Consumer Services industry had an overall loss of 1.93% but its biggest gainers were Diamond

Resorts, Marriott, Chipotle, Jack in the Box, and Royal Caribbean Cruises. The US Auto

Manufacturer Index showed a gain in 2.38% and their top gainers were Toyota and Tesla. In the

Media industry, things are actually looking good, with a gain of 3.10% despite many losses this

year. Top gainers in that industry include AMC, DirectTV, and Walt Disney Corp. In the last 3

months consumer discretionary was up about 4.35% but this year their sector as a whole is down

1.14%.

Examples of what companies are in this sector:

In Consumer Discretionary, there are many companies within each industry. One

example of the company within this sector is Walt Disney. Walt Disney is a leading diversified

international family entertainment and media enterprise. It manages five business divisions:

Media Networks, Parks & Resorts, Studio Entertainment, Consumer Products and Interactive

Media. The Media Networks division is the domestic broadcast television network such as

Disney Channel. The Parks and Resort division manages resorts such as Disney World Resort in

Florida and theme park like Disneyland in California. Walt Disney Parks & Resorts currently has

11 theme parks and 44 resorts in North America, Europe and Asia, and one being built in

Shanghai. Walt Disney also has a Cruise Line with four ships. The Studio Entertainment creates

and obtains live-action and animated movies for worldwide distributions to the theaters, home

entertainments and television markets. Walt Disney also has joint ventures with companies such

as Marvel Studio, Pixar Animation Studio, and other companies. The Consumer Products

handles products like toys, educational books, magazines, apparel, art and digital products

through The Disney Store and DisneyStore.com. The Interactive Media is one of the largest of

high quality interactive entertainment throughout all digital media platforms. Disney Interactive

creates blockbuster mobile and console games, online virtual worlds and the website called

Disney.com.

Investment Strategies:

There are many companies within the consumer discretionary sector, but one of the

biggest companies that everyone talks about is Walt Disney. Walt Disney is definitely one of the

top companies to look into for investment. Earlier this year, Disney signed a partnership deal

with Dish Network, which caused both of their stocks to go up. Their animated film Frozen won

two Oscars and because of the success, it generated a lot of revenue for Disney. Also Apple and

Disney’s relationship are getting a lot closer because iTunes now has Disney Movies. There are

also rumors that Apple might buy Disney.

Earlier last week, Disney released their earning report and its profit exceeded beyond

analyst’s estimates. Net income increased from $1.01 a share ($1.85 billion) to $1.28 a share

($2.25 billion), while the estimate of 28 analysts was $1.16 a share. Not only did Disney profit

from TV division, but they also gained a lot of profit from the theme parks, with a 23% increase.

The news indicates that Walt Disney is still growing and will continue to expand, so it is

definitely a good company for long term investments.

Michael Kors recently released their earning reports, which stated that their profit also

exceeded the estimates. KORS earnings per share had a 50% year over year gain to 91 cents, and

beat the estimates by a dime. Revenue increased 43% to $919.2 million. KORS stock was one of

the most heavily traded stock, but it is slowly stopping. It reached the top in February and now it

is slowly turning into a short selling stock. KORS stock already broke below its 200-day average

in mid-July. There is a short selling opportunity with the target in the high $60s or low $70s.

How you feel about the Consumer Discretionary Sector:

Consumer discretionary stocks have been performing the worst out of all the nine major

sectors thus far in 2014. It is a concern that the consumer discretionary has not been

outperforming the S&P 500 because this sector tends to indicate how well the economy is doing

overall. The industries in the consumer discretionary sector include automobiles, textile &

apparel, and hotels & leisure media, which are typically industries consumers will spend money

on when they are doing well financially. For example, when the economy weakens, consumers

are less likely to spend money in the automobile industry, thus choosing to wait till there is

positive growth in the economy before buying a new car. In the Consumer Durables & Apparel

Industry, economic growth is beneficial because then the customer base for luxury goods such as

home furnishings and jewelry increases. When it comes to the media industry, advertising and

entertainment sales also benefit from an economy that is doing well because more people are

buying products that are being marketed towards them on television and the internet.

What will happen in the future?

Automotive industry outlook. Global profit for automotive Original Equipment

Manufacturer (OEMs) are expected to rise 50% by 2020, and this profit growth will mainly come

from sales growth in emerging markets (BRIC and RoW) while established markets (US.

Europe, Japan, and South Korea) will be stagnant. Since the crisis, automotive industry profits in

Europe fell to a loss of EUR 1 billion due to overcapacity from regional manufacturing and

global competition and this trend would continue, whereas Japan and South Korea saw positive

profit of EUR 1 billion for the first time since 2008 but this trend does not look likely to be

sustained. Sales in North America reached the record level in the past five years, and this trend

would likely to continue with different product mix. Increased regulations with respect to

environmental and safety standards, manufacturers are pushed to develop alternative power-train

technologies for lower-emission (hybrid and/or electric) vehicles. Also, increased demand in

emerging markets give an opportunity for OEMs to further align production and supply bases in

the regions.

Media industry outlook. The media, entertainment and information industry is the major

role in informing, educating, and entertaining consumers. The industry has been broadened with

growth of electronics and technology and internet became more easily accessible. Currently, 2.7

out of 7.1 billion people are connected to broadband services throughout the world. Global

entertainment and media revenue will continue to grow over the coming years as digital driven

revenue growth and spending differs across different segments and countries. A concern for

content providers is that spending on internet access may be taking share away from spending on

content and services. In 2013, 45% of total entertainment and media revenue came from

consumers, 30% from advertising, and 25% from internet access. In the near future, internet

access share will rise while the proportion from consumers will slip.

Sources:

http://finance.zacks.com/difference-between-consumer-staples-consumer-discretionary-etfs-

1120.html

http://investorplace.com/2014/08/michael-kors-stock-charts-short/#.U-QqqIBdUrr

http://investorplace.com/2014/03/5-things-driving-dis-stock-roof/#.U-QdnoBdUrp

http://www.bloomberg.com/news/2014-08-06/disney-profit-tops-estimates-as-hit-films-spark-

studio.html

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Advanced Industries. McKinsey&Company Inc, The road to 2020 and beyond: What’s driving

the global automotive industry? August 2013

https://www.pwc.com/gx/en/global-entertainment-media-outlook/data-insights.jhtml