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P&G Earnings Review – Procter’s Gamble Yet To Pay Off

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By: Bob Cramer
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Although A.G. Lafley’s return to The Procter & Gamble Company (PG) in May 2013 was taken by investors as heralding a turnaround for the company, hopes may have run too high. This much has been evident since the day of P&G’s first quarter (1Q) fiscal year 2014 (FY14) earnings announcement – the stock is up a mere 1.5% since, even though results were better than expectations.

The consumer goods manufacturer posted diluted earnings per share (EPS) of $1.04, 2.3% better than consensus estimates. Organic sales grew 4% in the quarter, as in the preceding quarter, while sales and earnings were up 2% and 8%. The company maintained its guidance for organic sales growth between 3-4%, and core earnings per share growth to clock in between 5-7% for the full fiscal year.

Nonetheless, investors, who have been staking out for almost a year now for a noticeable improvement in P&G’s performance, seem to have been left unsatisfied despite P&G’s “good market share momentum” (Lafley’s words, not ours) and the promise of innovative new products. Bidness Etc takes a look at why P&G’s better-than-expected group is just not good enough for stakeholders.

Segment-wise Review

Three of P&G’s five business segments (Beauty, Grooming and Health Care) saw sales fall in 1QFY14. The three segments had together contributed 48% of its total revenues and 54% of its total earnings in FY13.

Beauty Segment

Organic sales growth in the Beauty segment was largely a product of overall growth in the market for beauty products. Innovations in hair care, deodorants, cosmetics and personal cleansing products drove the segment, but dollar sales from the skin care segment declined despite an increase in sales volumes due to lower pricing.

The marginal growth in organic sales despite increased innovation is not a good sign for the company, and may signal trouble going forward.

Grooming Segment

The Grooming segment lost 3% of its net sales, even though organic sales were marginally higher. This was largely because the sluggish growth in developing markets was insufficient to offset a contraction in unit sales volumes in developed regions. Sales fell despite higher pricing of products and innovation in the blades, razors and appliances categories. Blades and razors, P&G’s core products in the grooming segment, saw low sales growth in developing markets and a decline in developed markets despite product innovations.

Disappointing results from both developing and developed markets are a major cause of concern, and put a question mark on the effectiveness of Lafley’s turnaround plans.

Health Care Segment

The Healthcare segment posted flat organic sales and a 1% decline in sales volume and net sales. Performance dipped due to multiple factors, including a decline in sales volumes due to higher prices of Vicks and Metamucil, and a substantial decline in organic sales in the pet care category. Sales of personal health products showed some promise, but their impact was negligible on the overall segment.

The oral care category was the only category to post sales volume growth in developing markets, but it too faced tough competition in developed markets. The Healthcare segment’s dependence on oral care for oral care is therefore a risk, given the fact that competition will only intensify in the category from companies like Colgate-Palmolive Company (CL).

Fabric & Home Care Segment

The Fabric & Home Care segment’s net sales grew 3% year-over-year – the highest among all P&G segments. Increased demand from Brazil, Mexico and Greater China drove organic sales and volumes up 6% each. Even though organic sales were higher, in part due to lower pricing, the reduced prices and changes in foreign exchange rates negatively affected net sales.

The encouraging performance aside, investors should keep in mind that the segment has traditionally contributed most to P&G’s growth, and growth here does not really reflect the success of Lafley’s turnaround initiatives.

Baby, Feminine & Family Care Segment

Organic sales and sales volumes in this segment increased 6% each, with pricing unchanged. The growth followed stronger demand in North America for baby care products and new feminine care products like Charmin Ultra Soft, Charmin DuraClean and Bounty Trap & Lock.

The Feminine Care segment also recorded volumetric growth in the Indian market, but suffered in China. Though product innovations in the segment were largely successful, they did not have as significant an impact as could have been achieved.

Analyst Estimates

In light of P&G’s lukewarm successes on the path to a turnaround, most analysts have revised their estimates for 2QFY14. Per share earnings estimates for 2QFY14 have been trimmed by 4 cents on average, with adjusted earnings now expected to be $1.21 for the quarter. Adjusted EPS for FY14 is similarly expected to be at the midpoint of the company’s guidance of $4.25 to $4.33.

Conclusion

As discussed earlier, these results are not exactly what investors expect from Lafley. Meanwhile P&G still expects most growth to be generated from Brazil, Russia, India and China – all countries where its ten-year revenue compound annual growth rates have been in the range of 17-27%.

But competition in emerging markets will be a significant barrier to growth, especially from companies like Colgate in the Healthcare category and L’Oreal SA (LRLCY) in the Beauty category. As is evident from the earnings announcement, P&G is already losing ground in developing markets in three of its five business segments in terms of sales volumes.

P&G’s management may continue with its turnaround initiatives, but Bidness Etc questions their effectiveness in resolving the company’s problems. We have analyzed and discussed the company’s future outlook in “P&G: Lafley’s There, but Not There Yet!”, and remain neutral on the company.

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