Procter & Gamble Delivers Broad-Based Growth

The world’s leading consumer goods company, Procter & Gamble (NYSE:PG), outpaced organic growth achieved in previous quarters of fiscal year 2013 with 4% y-o-y increase in organic sales in Q4 2013. This increase came on the back of strong organic volume growth of 5%. However, the higher organic sales growth translated only into 2% rise in net sales as unfavorable foreign exchange and geographic/category mix reduced sales by 2% and 1%, respectively. ^[1]

P&G delivered an innovation driven, broad-based performance as all the divisions posted year-on-year organic sales growth of 3% or more in the quarter. The health care and fabric care & home care divisions particularly outperformed with 7% and 5% increase in organic sales, respectively. The results also accentuated strong growth in the company’s home market, the U.S., which accounts for over one-third of the total sales and profits; organic sales growth in the U.S. stood at 7% y-o-y. Overall, the results slightly exceeded our expectations. (Read: Procter & Gamble Earnings: New Products And Operational Efficiencies Will Lift Results)

See our full analysis for Proctor & Gamble

Beauty Division Market Share To Marginally Grow In The Future

The beauty division had been stirring concern among investors due to its lackluster performance. Organic sales declined by 1% y-o-y in Q3 2013, due to heavy competitive product and promotional activity. The division performed slightly better in Q4 2013 on account of innovation-driven growth in personal cleansing products, cosmetics and deodorants, aiding it in registering 3% y-o-y growth in organic sales. P&G derives about 25% of its revenues from beauty products. Its portfolio includes iconic brands like SK-II, Hugo Boss, Dolce & Gabbana, Gucci, Lacoste, James Bond 007, Head & Shoulders, Olay and Pantene, making it a major competitor in the world prestige beauty and fragrance market.

Recently, the company forayed into the booming travel retail market with Dolce & Gabbana The Make Up, setting up its second retail outlet at the London Heathrow Terminal 5. ^[2] We believe this will help the company to capture a larger share of the blossoming travel retail market as well as contribute to the sales of it beauty division, which accounts for over 20% of our price estimate for the company. P&G has also seen the return of A.G. Lafley as the new CEO. Under his leadership during 2000–2009, P&G transformed into a major beauty player by divesting many low profitability businesses, acquiring  hair care players such as Wella AG and Clairol, and reinventing Olay to make it a billion-dollar brand.

In addition, as the global economy recovers we expect the appetite among consumers for premium brands to increase. Based on these factors, we estimate P&G’s beauty division will gain market share in the future in both developed and developing countries. However, the increase will be small due to high competition in the segment, adverse affects of product mix in emerging markets and cost-saving measures that may eat into the company’s marketing budgets.

Productivity Enhancement And Cost Savings To Continue Supporting Gross Margins

In 2012, P&G embarked on an ambitious mission to save $10 billion in costs by undertaking a restructuring program across the company. It plans to complete this program by the end of fiscal 2016. Under this program, the company will save $6 billion in costs of goods sold while another $1 billion and $3 billion of savings will come from marketing efficiencies and non-manufacturing overhead, respectively. P&G is also working to reduce its working capital requirements by as much as $2 billion by increasing the number of days it takes to pay its suppliers.

The agenda behind the cost savings and productivity enhancement initiatives is to have financial flexibility in order to maintain investment levels and drive long term growth even in weaker microenvironments. P&G delivered better than its plans for fiscal year 2013, with 7% increase in manufacturing productivity compared to the targeted 5%. It also saved $1.2 billion in cost of goods sold. ^[3] The initiatives have helped P&G offset the impact of innovation related and new production capacity startup costs on its gross margins.  We believe the company will continue to reap benefits from these initiatives.

Fiscal Year 2014 Outlook

• Challenges: Weak underlying market growth, strong dollar, high commodity costs and high competition
• Opportunities: Positive market share momentum, promising innovations and cost savings from enhanced productivity
• Guidance:
  • Organic sales growth: 3%-4%
  • Net sales growth: 1%-2%
  • Foreign exchange impact: -2%
  • Cost of goods sold savings: $1.4 billion
  • Manufacturing productivity increase: 2%-4%

We have updated our price estimate for Procter & Gamble’s stock based on the fourth quarter results.

1. Procter & Gamble Q4 2013 Earnings Call Transcript, Seeking Alpha, August 2013 [↩]
2. Procter & Gamble Expands Its Prestige Beauty Presence In The Travel Retail Market, Trefis, June 2013 [↩]
3. Procter & Gamble Q4 2013 Earnings Call Transcript, Seeking Alpha, August 2013 [↩]