Investor’s Guide to GLP-1 Drugs: Is the Appetite for Some Consumer Discretionary Stocks About to Change?
Author: Henry Kwok
July 10, 2024
The hype surrounding glucagon-like peptide 1 (GLP-1) drugs may have begun when they were first approved for treatment of Type 2 diabetes, but it could be that investors are even more excited about its potential role in treating obesity, a disease that now effects over one billion people worldwide, according to the World Health Organization.
Of course, most of that excitement centres on the drugmakers themselves, yet we anticipate many other types of companies could end up potentially benefiting (or losing out) should GLP-1s prove to be an effective weight loss treatment over time – and not just other healthcare names, as was discussed in Part 1 of our series. It may also be true of stocks in segments of the global equity market that may not be as obvious to investors.
Take the Consumer Discretionary sector, for instance. Restaurants, clothing retailers and fitness chains could all be affected by the growing use of GLP-1s for treating obesity – especially if that results in more of the positive side effects long associated with weight loss, such as improved self-esteem and body image, as well as better eating habits and healthier lifestyles overall.
Restaurants
We believe the restaurant industry could be the consumer discretionary segment with the most at stake on this front. According to a recent survey conducted by Morgan Stanley, the majority of GLP-1 users are spending less on restaurants since they’ve started their medication – not just because they are dining out less frequently, which they are, but also because they are ordering less food when they do.
Moreover, even though GLP-1 users’ choice of restaurants has remained broadly unchanged, it is expected that quick-service restaurants will end up being more negatively impacted than fine-dining restaurants on a relative basis. Still, the actual impact on each restaurant chain may vary widely based on several factors, including the type of food being served and nutritional value of the menu, as well as the frequency of visits and whether one is eating alone or with a group.
We also believe that restaurant chains with a higher mix of establishments outside the United States may be less impacted from headwinds due to increasing GLP-1 usage. This is because the obesity rate in the U.S. is over 40%, the highest among countries in the developed world, according to the World Population Review.
Meanwhile, we believe companies with a higher mix of franchised operations should also be more financially insulated relative to companies with a higher mix of company-owned restaurants. While both could experience declining sales from a drop in customer traffic and/or a reduction in the average cheque size per meal (i.e. ticket size), the former’s profitability may be less impacted because of the latter’s additional responsibility to cover all fixed overhead costs necessary to keep their restaurants running.
Apparel and Sportswear Brands and Retailers
Many clothing retailers could potentially benefit from GLP-1 users needing to refresh their wardrobes as they lose weight, but there may still be distinct “winners” and “losers” across the spectrum.
The biggest beneficiaries, for instance, might end up being the sportswear and athleisure businesses given the tendency of GLP-1 users to exercise much more regularly than they did before starting treatment. In fact, about 70% of respondents to the Morgan Stanley survey said they now exercise several times a week, versus just 35% who said they exercised this frequently before starting their GLP-1 medication.
On the flip side, there are a small number of specialty clothing retailers specializing in plus-sizes that could face tremendous headwinds from weight loss associated with GLP-1s, namely resulting in shrinkage of their total addressable market over time.
Fitness Centres and Fitness Equipment Makers
Another, perhaps obvious, segment of the Consumer Discretionary sector that could potentially benefit from the use of GLP-1s for weight loss is that related to fitness. As noted above, GLP-1 users are more likely to exercise than they did before starting treatment, largely because their weight loss makes them more physically able and more mentally motivated to work out. In addition, routine exercising is often prescribed by physicians as part of a GLP-1 user’s weight loss regimen.
While GLP-1 users may join a fitness centre or purchase home gym equipment at the beginning of their therapy, their lifetime value (to these businesses) remains to be determined given the high drop-out rate of the currently available GLP-1 therapies. According to a recent AllianceBernstein paper, studies indicate that one third of users quit after one year of treatment, and that participants regained two-thirds of their prior weight loss a year after stopping treatment.
Indeed, the relatively short “stay time” remains one of the caveats to the GLP-1 theme. And this is true regarding the restaurant industry and apparel brands and retailers as much as it is fitness-related businesses.
So, while GLP-1 drugs have the potential to improve the outlook of consumer discretionary stocks that may benefit from an emphasis on health and wellness, more proof of these drugs’ long-term effectiveness in treating obesity may be needed to make these opportunities a reality.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
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