[Deborah Marchini, Cnn Anchor:] Gillette, Colgate and Avon, all multinational firms, will report earnings before today's opening bell.
[David Haffenreffer, Cnn Anchor:] And here now to give us a preview of that group's outlook is household products and cosmetics analyst Carol Warner Wilke of Credit Suisse First Boston. Good morning to you.
[Carol Warner Wilke, Credit Suisse First Boston:] Good morning.
[Marchini:] Welcome.
[Haffenreffer:] This early part of the day here. This has been an interesting sector of late. And these are obviously all household names that people know. Are you generally expecting strong reports from these companies?
[Warner Wilke:] Once again, it's going to be a mixed quarter. Over the past several years, almost every quarter there are at least one or two companies that pre-announce either a sales or earnings or both shortfall. And this quarter has been no different. So it's going to be mixed, and I think what we've come to expect is just hoping that the companies will come in as expected for the ones that haven't pre-announced. So nothing rip-roaring, just trying to get through without any more disasters.
[Marchini:] These are multinational companies, as we noted in your introduction. To what extent have their sales been hurt by the valuation of the currencies? particularly the weak euro? because when you bring your profits back they're worth less.
[Warner Wilke:] It's actually been a problem for about three years, and particularly with euro this year. For example, Gillette's currency hit this quarter will probably be minus five. A lot of the companies...
[Marchini:] What does that mean, minus five?
[Warner Wilke:] Minus five percent off the top line.
[Marchini:] Wow.
[Warner Wilke:] So the reported sales might be flat. If you took out the currency hit it may be up five. But it's been an issue all along. Sort of started with the Southeast Asian blow up, and then there was Russia, then Brazil. So it continues to be a challenge for them.
[Haffenreffer:] In general, Gillette, are they doing OK? Let's see, we've been hearing about them quite often, mostly in the form of earnings warnings of late.
[Warner Wilke:] I think they're making some progress. I think that the concern is still going forward, what's going to be their consistent sales and earnings growth rate? This quarter they did announce back in May that sales were going to be lower than expected because of the euro and some, you know, competitive challenges. So they're better than they were a couple of years ago, but I still think there's some work to do.
[Marchini:] All right, interesting company is Avon, because of its sort of policy of selling on an individual basis rather than the traditional retailers, where a lot of women purchase make up. How have they adapted?
[Warner Wilke:] Well, one of the things they are planning to do in the U.S. to sort of broaden their audience and not just be direct sellers, they're planning to link up with the retailer and actually do a store-within-a-store to try to, you know, get to other customers that aren't interested in going directly. Also, sell on the Internet, so you can go in, log on, and purchase Avon products. You can use a representative or you can not. And actually, outside the U.S., they do a lot of franchising. So it's not solely direct selling, but it's a matter of balancing the different channels.
[Marchini:] The company really has changed, has it helped?
[Warner Wilke:] Yes, so far, it's helped. I mean, this is a company that in the past has had some pretty rocky times. But this year, so far, their results have been very strong and they've actually been pretty much the best performer on a sales and earnings basis in the space.
[Haffenreffer:] We've got Alan Greenspan talking to Congress today down in Washington. He's doing his best to slow down the U.S. economy. Are you expecting slower growth out of this sector in third and fourth quarters this year?
[Warner Wilke:] If the U.S. economy slows, it's really not as much of an impact on these companies because of what they sell. Certainly in developing markets, if the economy is slow, it's a big problem. But for this group, no. They have enough other challenges to deal with. But a slowing U.S. economy isn't going to impact them significantly.
[Marchini:] Besides Avon, do you see another big winner in this group?
[Warner Wilke:] Estee Lauder has been one of the best performers, and consistently ever since it's been public. It's top line grows, typically, eight to nine percent on a reported basis. So no matter what the euro is doing, their top line growth is very strong. And their earnings grow faster. So that's really been the best one overall. They've got a phenomenal business model and a great portfolio and management.
[Haffenreffer:] We had a list up of many of the stocks in the sector a moment ago. And the only winner on there is Avon, on a year- to-date basis. Are we likely to see any turnaround for the others any time soon?
[Warner Wilke:] I don't think anytime soon. You know, there are a lot of still challenges ahead. I think that the fact that there have been so many misses just in general really took away a lot of the appeal for this group. You used to buy them because they always nailed the earnings at a quarter and we've seen more often than not, they're not. So it's really on a company-by-company basis. Avon's had a great six months, their recovery is continuing and the stock's reflecting that.
[Marchini:] Carol Warner Wilke, Credit Suisse First Boston, we thank you for being here this morning.
[Warner Wilke:] Thank you.