Earnings Microscope Turns to Supermarket Aisle

Investors are looking for glimmers of economic hope in the everyday basics, from cereal to pens to cleaning supplies.

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Consumers worried about jobs and tight credit have not only cut back on big-ticket items like sofas but also scaled back on the daily necessities. They're buying less and switching to lower-priced store brands.

This week's second-quarter earnings reports include results from companies that directly or indirectly serve the consumer, including Colgate-Palmolive; Sealed Air, the maker of Bubble Wrap; Dow Chemical, which makes base products for a wide array of everyday items; and Newell Rubbermaid, manufacturer of office supplies, tools and cleaning and home storage items. They should serve as barometers of how much Americans are willing to spend and, because consumer spending accounts for more than two-thirds of economic growth, shed some light on the timing of a recovery.

Results at Colgate-Palmolive, known for its namesake toothpaste and dish soap, and cereal maker Kellogg should reveal whether shoppers are still cleaning out their cupboards of food and household products before buying any new items. If consumers are starting to stockpile again, that could show they're feeling more confident about their financial security.

At family entertainment powerhouse Walt Disney, analysts will be watching for signs that more people are going to the movies, buying toys and visiting theme parks.

Here's a look at some of these purveyors of products that affect consumers' everyday lives and what their earnings might tell us:

Disney

  • Why it's important: The family entertainment conglomerate which owns the Disney movie studio and theme parks, as well as ABC, ESPN and the Disney Channel, is a yardstick for the health of many businesses that rely on consumer spending: movies, theme parks, toys and advertising.
  • When it will report: Thursday, July 30.
  • What the experts say: On average, analysts polled by Thomson Reuters expect Disney to post a profit of 50 cents per share on revenue of $8.82 billion. In the same quarter of last year, the company reported a profit from continuing operations of 62 cents per share on revenue of $9.24 billion.
  • You'll know the economy is improving if: Disney beats profit expectations. Also, if the company doesn't announce more job cuts, it may be a sign the economy has hit bottom.
  • You'll know the economy is not improving if: Advertising revenue declines further than expected, signaling that businesses are still wary about spending money. Ad sales are expected to be down 10 percent for broadcaster ABC and off in the single-digits at ESPN.
  • The quote: "We see continued signs of stability in the marketplace, but that stability is coupled with a continued caution on the part of consumers. We also see that same sort of caution in terms of the advertising market ... I don't feel like it's just a 'snap-back-to-normal' sort of situation," Disney Chief Financial Officer Tom Staggs said at an investors conference in June.

Newell Rubbermaid

  • Why it's important: The consumer products company makes everything from power tools to pens, which means millions of shoppers browse Newell Rubbermaid brands including Rubbermaid, Papermate and Graco. Like many competitors, Newell Rubbermaid has seen cost-conscious customers delay purchases or trade down to cheaper, generic brands.
  • When it will report: Thursday, July 30.
  • What the experts say: On average, analysts polled by Thomson Reuters expect Newell Rubbermaid to post a profit of 35 cents per share on revenue of $1.46 billion. In the same quarter of last year, the company reported a profit of 33 cents a share on revenue of $1.83 billion.
  • You'll know the economy is improving if: Consumers buy more of the company's office supplies, tools and cleaning items than they did in the first quarter, when sales fell 16 percent. Analysts aren't expecting sales to rise from their levels of a year ago, but a "less bad" decrease would show that shoppers aren't delaying purchases for nonessential items as they have been doing.
  • You'll know the economy is not improving if: There's a large decrease in sales compared to the first quarter. That's a sign shoppers still aren't opening their wallets unless they have to.
  • The quote: "They've definitely been struggling over the past several quarters because of commodity prices," said Morningstar analyst Erin Swanson. "So that's caused them to really take a look at their business."

Kellogg

  • Why it's important: The recession has generally helped the world's largest cereal maker as people began eating cheaper meals at home to save money. That has allowed Kellogg to make price increases stick even as ingredient costs eased somewhat. Cheerios maker General Mills Inc. posted a big profit earlier this month.
  • When it will report: Thursday, July 30.
  • What the experts say: On average, analysts polled by Thomson Reuters expect Kellogg to post a profit of 82 cents per share on revenue of $3.25 billion. In the same quarter of last year, the company reported a profit of 82 cents per share on revenue of $3.34 billion.
  • You'll know the economy is improving if: Strangely, a decline in cereal sales might point to some economic improvement, because it could mean consumers are going back to more expensive meals.
  • You'll know the economy is not improving if: Kellogg has had to cut prices on cereal to maintain sales. That could be a sign consumers are watching their spending even more.
  • The quote: "Given the broad category strength, we believe that regardless of share trends in 2009, Kellogg cereal should show improved volume trends as the year progresses," Janney analyst Jonathan Feeney wrote in a research note.

Colgate-Palmolive

  • Why it's important: Colgate makes well-known consumer products, that, along with its namesake brands, include Ajax cleaner and Irish Spring soap. Although the company has kept firm on prices, its business has suffered little from consumers trading down to cheaper products.
  • When it will report: Thursday, July 30.
  • What the experts say: On average, analysts polled by Thomson Reuters expect Colgate to post earnings of $1.05 per share on revenue of $3.8 billion. In the same quarter of last year, the company reported a profit of 98 cents per share on revenue of $3.96 billion.
  • You'll know the economy is improving if: Consumers keep lining up to pay full price for Colgate's products. With so many Americans watching their spending, their willingness to pay more for Colgate's brand-name products might indicate an improvement in consumer spending.
  • You'll know the economy is not improving if: Consumers empty their pantries before heading to the store to buy more Colgate products. If consumers are using up what they already in hand have before buying more, it likely means they're still be strapped for cash.
  • The quote: "With its dominant oral care market share positions, especially in Latin America, Colgate has aggressively led price increases to offset currency transaction and commodity inflation," said Deutsche Bank analyst Bill Schmitz.

Dow Chemical

  • Why it's important: Dow is the nation's largest chemicals maker and supplies the building blocks for thousands of everyday items like shopping bags, cologne and food dye. Dow has been making commodity chemicals -- which come from fossil fuels -- for years, but recently bought Rohm & Haas for more than $16 billion, a move it hopes will help it grow in the higher-margin specialty chemical sector.
  • When it will report: Thursday, July 30.
  • What the experts say: On average, analysts polled by Thomson Reuters expect Whirlpool to post a loss of 8 cents per share on revenue of $13.3 billion. In the same quarter of last year, the company reported a profit of 81 cents per share on revenue of $16.38 billion.
  • You'll know the economy is improving if: Dow reports its customers have exhausted old supplies and are starting to buy again. When the recession hit, many of Dow's customers stopped buying its products, preferring instead to exhaust existing supplies, a process known as "destocking."
  • You'll know the economy is not improving if: Destocking continues and Dow's customers hold back on additional purchases. Dow rival DuPont Co.'s second-quarter profit was supported mainly by agricultural sales. If Dow's performance mirrors DuPont's, it'll be a bad sign for its core chemical business.
  • The quote: "We expect weak industrial, auto, and housing market conditions to linger well into 2010," BB&T Capital Markets analyst Frank Mitsch.

Sealed Air

  • Why it's important: Sealed Air, which makes Bubble Wrap, is one of the world's largest makers of protective packaging for breakable items as well as the clear plastic wrap grocers use for cuts of pork, chicken and beef.
  • When it will report: Wednesday, July 29.
  • What the experts say: On average, analysts polled by Thomson Reuters expect Sealed Air to post a profit of 34 cents per share on revenue of $1.06 billion. In the same quarter last year, the company reported a profit of 34 cents per share, on revenue of $1.28 billion.
  • You'll know the economy is improving if: Sealed Air reports volumes of Bubble Wrap and shrink wrap are increasing. That would indicate companies are shipping more items, often to retail buyers, indicating that customers are starting to spend again. Also, rising resin prices, a key cost for the company, could indicate that demand, and the economy, are strengthening.
  • You'll know the economy is not improving if: Volumes of Bubble Wrap and shrink wrap are stagnant, if the company announces capacity reductions or if resin prices remain flat or even decline.
  • The quote: "Given Sealed Air's large exposure to meat packaging, the biggest near-term risk could come from disruptions in meat production. Beef and poultry production is reported to be down. The greatest risk is to Sealed Air's high margin pork export business in the wake of falling pork supply," said Deutsche Bank analyst Mark Wilde.