Five Things You Need to Know: Wants versus Needs
There's times when you can sell customers their wants, and there's times that you've got to sell them their needs, and right now it's needs based.
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Durable Goods Orders Point to Healthy Capex
The lone piece of important economic data out this morning was Durable Goods orders, which came in much better than expected- better-than-expected being a decline of 0.5% in the headline number. Most economists surveyed were looking for orders to decline 1.5%.
Still orders for durables, excluding transportation, rose 2.5% in April, the most since last July, the Commerce Department said. The rise there was led by strong demand for electrical equipment, up nearly 28% after March's 18,95 decline.
The core capital goods orders (nondefense capital goods orders excluding aircraft) rose a robust 4.2% in April, the best performance so far this year, and that suggests capital expenditures haven't yet been squashed by rising energy prices.
Bottom Line: This was a better-than-expected report and the internals point to business spending being far more resilient than consumer spending.
2. Dow Chemical Raises Prices
Dow Chemical (DOW) said this morning the company will raise prices on all products as much as 20% due to rising prices for energy, raw materials and transportation, Bloombeg reported.
Dow is forced to take the pricing measures after a 42% spike in first-quarter spending on raw materials and energy, Chief Executive Officer Andrew Liveris said.
While food staples companies have been able to pass through costs without seeing demand slip, it will be interesting to see how successful Dow is in passing through increased costs.
3. Wants versus Needs
One of our themes of staples displacing wants was in full display this morning as Dollar Tree (DLTR) announced first quarter results. Total sales increased 7.8% year-over-year and comp store sales increased 2.1% for the quarter. The stock is up 34% year-to-date.
Management deserves credit for recognizing the economic headwinds early and over the past few years increasing the store's focus on consumer needs items versus discretionary inventory.
DLTR President and CEO Bob Sasser said on the earnings call that for many customers, DLTR has "become a destination for categories such as basic cleaning supplies, health and beauty care in a variety of consumer basics, things that people need every day." Those are some of the store's fastest-growing categories.
Interestingly, Dollar Tree may be, in fact, one beneficiary of the tax rebate stimulus checks, probably at the expense of even Wal-Mart (WMT) and Target (TGT) as consumers continue to trade down from the trade down stores. Sasser noted that "[I]n the past we have seen some evidence when there was a stimulus program that we did get our share of that; I think we are getting some now actually."
But again, it's wants versus needs for the consumer right now, and needs are winning. "There's times when you can sell [customers] their wants, and there's times that you've got to sell them their needs, and right now it's needs based," Sasser said.
4. Tech "Staples" vs. Tech "Wants"
Speaking of wants versus needs...
We hate to ruin the "Financials have bottomed" bandwagon, but while everyone is staring at Goldman Sachs (GS), Lehman Brothers (LEH) and JP Morgan (JPM), Tech is quietly working on a 4% month, making it the number one sector topping even Energy.
The same long-term thesis, consumer staples versus consumer discretionary, applies to tech stocks, however. Simply put, there are tech companies that make things we need and tech companies that make and sell things we want.
One way to take advantage of this longer-term thesis might be to be long the needs companies, and short the wants companies.
Tech stocks related to things we need include companies like Corning (GLW) and PerkinElmer (PKI), while companies that are busy producing or selling things we want include Apple (AAPL), Sony (SNE) and GameStop (GME).
5. Coke KO's the 20-Ouncer
Remember a couple of weeks ago when we looked at Pepsi (PEP) testing new 12-ounce and 16-ounce bottle sizes due to sagging demand for larger sizes? Now Coca-Cola Enterprises (CCE), the largest bottler of Coca-Cola (KO) beverages, is looking to de-shelve their 20-ounce bottle due to "weaker economic trends."
According to the Wall Street Journal, a weak economy has hurt sales of the company's high margin 20-ounce sized beverages and negatively affected operating income.
"Sold in corner groceries, vending machines and other outlets since the early 1990s, soft drinks in 20-ounce plastic bottles revitalized U.S. sales for Coca-Cola and PepsiCo Inc. by getting Americans to drink larger servings," the Journal article noted. "Because they are often sold at prices similar to a two-liter bottle, they have also been highly profitable for the companies' bottlers."
What isn't being mentioned is how this ties in with the social mood and the desire to cut back, cut down, reduce and downsize. Positive social mood embraces expansion, risk-taking, ostentatious displays where more is more and therefore better. Negative social mood is more introspective, risk averse, questioning; perhaps we don't really need 20 ounces of carbonated sugar- beverages.
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