P&G Grows Despite Flat Sales In Beauty And Developed Markets

Procter & Gamble (NYSE:PG), the world’s leading consumer staples firm, posted 3% year-over-year increase in organic sales (excludes the impact of acquisitions/disposals and foreign currency movements) in the second quarter  of FY 2014. (Fiscal years end with June.)  Net sales of $22.3 billion were flat as the organic sales growth was offset by foreign currency translation effects. The increase in organic sales was mainly driven by 8% sales growth in the developing markets as developed markets were nearly flat. While all other segments registered low-to-mid single-digit organic sales growth, beauty organic sales were essentially flat during the quarter. ^[1]

The gross margin decreased by 90 basis points to 50% as manufacturing savings were offset by the unfavorable exchange rates, higher commodity costs and an adverse geographic and product mix. Net income for the quarter stood at $3.4 billion, lower by 16% year on year, due to a $833 million reduction in non-operating income that resulted from acquisition and divestiture activities. ^[1]

P&G Confident About Growing Beauty Organically

The beauty division lost 0.4% share of the global beauty market due to a decrease in skin care sales, and the unfavorable impact of geographic and product mixes  This resulted from disproportionate growth in developing regions and mid-tier products, both of which have lower than segment average selling prices. ^[1] However, there were other positive developments as well, such as an increase in shipments across the hair care, personal cleansing, prestige beauty and antiperspirants and deodorants categories. During the earnings call, management expressed confidence in growing skin care sales organically, rather than through acquisitions. It feels that working on brand architecture, packaging and ensuring that its products reach consumers in different age groups can help bring the business back on track. ^[2]

P&G’s beauty portfolio includes iconic brands like SK-II, Hugo Boss, Dolce & Gabbana, Gucci, Lacoste, James Bond 007, Head & Shoulders, Olay and Pantene. We expect the appetite for these premium brands among consumers to increase as the global economy recovers. Additionally, P&G has established its presence in beauty through innovations, supported by widespread marketing campaigns. We think that the company will continue to do so which should help revive beauty sales.

Cost Savings And Productivity Initiatives To Help Support Gross Margins

In recent years, P&G has taken significant steps to enhance productivity, including a five-year cost savings initiative that will last until 2016. Through the initiative, P&G aims to save $10 billion in costs associated with cost of goods sold, marketing expenses and non-manufacturing overhead. The primary agenda behind the cost savings program is to have financial flexibility in order to maintain investment levels and drive long-term growth, even in weaker micro-environments. P&G saved $1.2 billion in cost of goods sold in FY 2013 and is on track to save another $1.6 billion in FY 2014, up by $200 million from the company’s last forecast. ^[3]

Reducing energy consumption is one field where P&G has done well to cut costs. In 2010, the company revealed a sustainability program to drive 20% reduction in energy usage per unit of production by 2020. The company has reduced energy consumption by 8% thus far, and continues to introduce energy management systems at new locations that will help it save millions of dollars. According to a recently published report by Bloomberg, P&G is also planning to restructure its global business units and that should help it achieve its cost savings target. (Read: Procter & Gamble Seems To Be On Track To Achieve Its Cost Savings Target)

We believe that the cost savings and the restructuring program will help P&G to drive gross margin improvement, and to accelerate sales growth by providing scope for increasing investments in innovations and expansion opportunities.

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1. P&G Quarterly Results, SEC, Q2 FY 2014 [↩] [↩] [↩]
2. The Procter & Gamble Company’s Management Discusses F2Q 2014 Results – Earnings Call Transcript, Seeking Alpha, January 2014 [↩]
3. ref:1 [↩]