U.S. consumer companies face slow recovery

Wed May 26, 2010 5:45pm EDT

* Consumers wary of lingering weakness in housing market

* Filling the caverns of empty office cubicles

By Ros Krasny

BOSTON, May 26 (Reuters) - Many U.S. consumer goods companies still face a tough operating environment as shaky consumer confidence and lingering high unemployment keep discretionary spending soft.

Companies from big box retailers to nutritional supplement makers presenting at a Janney Capital Markets consumer conference in Boston on Wednesday forecast better times ahead after a brutal 2008 and 2009.

But most are keeping a reign on expansion and looking for ways to boost margins with supply chain improvements, e-commerce and, in some cases, squeezing out costs from acquisitions.

Many workers were jobless for longer than in previous recessions; others took part-time jobs when they would have preferred full-time employment, government figures show. The results could have a lasting impact on their spending patterns.

David Flanery, chief financial officer with pizza chain Papa John's International Inc (PZZA.O), said consumers remain somewhat in a funk, even with the economy turning up.

"We're in the middle of a jobless recovery, and unemployment is a leading indicator for the health of restaurant companies," he said. "Restaurants are the ultimate discretionary spending category."

The U.S. economy, as measured by gross domestic product, has grown for the past three quarters after shrinking in five of the previous six quarters.

Unemployment was 9.9 percent in April, not far below its recent peak.

Consumers remain wary, said Larry Stone, president and chief operating officer at the home improvement chain Lowe's Companies Inc (LOW.N).

With about a year's worth of housing inventory overhanging the market and millions of mortgages under water, "I think that's got the consumer kind of edgy, and that gives us a little bit of concern," Stone said.

As a result, 2010 will likely be a "transition year" of uneven recovery in selected parts of the economy, with more broad-based improvement likely in 2011, he added.

Still, Stone said 21 of Lowe's 23 regions in the United States had positive year-on-year sales comparisons in the first quarter, including two with double-digit positives.

"It's been a while since we've said that. We've said double-digit negative a lot of times," he said.

At the conference focused on "the new normal" for consumer firms, Joseph Doody, president of North American delivery for office supply store Staples Inc (SPLS.O), said buyers are clearly more selective now, whether making purchases for themselves or for their businesses.

"People are buying the specials, but not adding as much to their overall baskets," he said. "And they are clearly buying a little bit less in some discretionary categories."

To counter a tendency for buyers to shop around, Staples has attempted to boost loyalty by signing up big customers for reward programs featuring cash back and other incentives.

Sales at chains such as Staples and rival OfficeMax Inc OMX.N are correlated closely with white collar employment -- the millions of workers sitting in office cubicles.

Huge layoffs during the recession mean that as the recovery moves ahead, office furniture sales could lag those of other business segments, said Doody.

"It depends how many empty offices there are to fill in before they run out of space," he said. (Reporting by Ros Krasny, editing by Leslie Gevirtz)

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