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Article | Executive Pay Matters

Consumer discretionary sector: Unprecedented upheaval

Executive Compensation
COVID 19 Coronavirus

By Michael Biggane and Chris Marques | May 5, 2020

With individual priorities shifting toward basic needs, it remains unclear how nonessential businesses will emerge from COVID-19.

With the shutdown of nonessential businesses across the globe and historic levels of unemployment and remote work arrangements, individual priorities have shifted toward basic and essential needs and away from such items as automobiles and apparel. It remains unclear how the sector will emerge when governments reopen the economy in earnest.

Against this backdrop, we explore the impact to date of the COVID-19 shutdown on the consumer discretionary sector of the S&P 1500. The sector includes 217 companies in the following industry groups and industry:

  • Automobiles and components industry group
  • Consumer durables and apparel industry group
  • Consumer services industry group
  • Specialty retail industry

It’s still unclear whether the recovery will be quick (“v-shaped”) or slow (“u-shaped”). For now, we explore how the sector’s stock returns have fared. March and April were both brutal and exceptionally volatile. Figure 1 tracks year-to-date total shareholder returns across the consumer discretionary sector through April 27, highlighting variations by industry groups within the sector.

While most companies within the sector are down significantly, automobiles and components have been hardest hit by COVID-19, a direct consequence of manufacturing plant and dealership closures amid social distancing measures. Other industry groups facing similar pressures, although at a slightly lower level, include consumer durables and apparel as well as consumer services and the specialty retail industry.

With more and more outright closures of nonessential retail operations, Amazon and other pure-play e-commerce retailers are benefitting from their online and e-commerce presence. Other brick and mortar specialty retailers have had to shut down physical stores in many cases and will continue to struggle for the foreseeable future.

Figure 1. 2020 total shareholder return for the consumer discretionary sector through April 27, 2020
Figure 1. 2020 total shareholder return for the consumer discretionary sector through April 27, 2020

S&P's Capital IQ database, 2020 year to date (through April 27, 2020)

The unprecedented crisis has deeply affected financial results and turned investment analysts’ 2020 expectations on their head, with expectations having significantly eroded since January (Figure 2).

YTD change in estimated 2020
Sector/Industry group/Industry     Revenue         EBIT
Consumer discretionary (sector) – 14% – 41%
Consumer services – 22% – 58%
Automobiles and components – 17% – 53%
Specialty retail – 13% – 41%
Consumer durables and apparel – 13% – 31%
Figure 2. Year-to-date (YTD) change in estimated 2020 financials, as of April 27, 2020

Willis Towers Watson surveys suggest that annual incentives for 2020 will be deeply impacted by the COVID-19 shutdown. Companies are anticipating a range of possible actions, such as:

  • Adjusting previously approved targets
  • Reducing threshold goals
  • Applying discretion at year-end
  • Changing performance metrics
  • Adjusting the performance period

Such adjustments should not be undertaken lightly as they are sure to be heavily scrutinized. With revenue and earnings expectations dropping precipitously, companies should adopt a disciplined framework for evaluating whether and how incentives should be modified. As a starting point, companies should consider the impact from financial, social, competitive and historical perspectives, then prioritize their motivation for acting — or standing pat for now.

Authors

Associate Director, Executive Compensation (Cincinnati)

Associate Director, Executive Compensation (Detroit)

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