Procter & Gamble (NYSE:PG) is set to release its results for the final quarter and complete fiscal year 2014 on Friday, August 1. The world’s leading consumer goods company posted a 3% year-over-year increase in organic sales (excludes the impact of acquisitions/disposals and foreign currency movements) in Q3 FY2014, at the lower end of its guidance. The increase was largely driven by a 3% rise in organic volumes as a 1% increase in prices offset an equivalent amount of decline due to adverse geographic and product mix. Selling prices in certain geographies and for certain products were lower than average which reduced organic sales. Foreign currency translation effects further weighed on the company’s quarterly results and, as a result, net sales ended flat compared to the year-ago period at $20.6 billion.
In early 2014, P&G lowered its guidance for sales and earnings growth for FY 2014 (fiscal year ends in June) due to unfavorable exchange rate movements in many developing economies and policy changes by the Venezuelan government. It expects currency translation effects to reduce all-in sales (accounting for the impact of currency movements) by 2%-3%. However, it maintained its guidance of 3%-4% growth for organic sales (excludes the impact of foreign currency movements). Consequently, all-in sales are now expected to register up to 2% growth, compared to the initial forecast of 1%-2% growth.
We have a $70 price estimate for P&G’s stock, about 10% lower than its market price. We will update our model after the upcoming results are announced.
Innovations Will Drive Gains In Market Share
P&G’s recent launches in fabric care, such as Tide pods, Ariel pods and Gain flings, are gaining traction in the developed markets. This helped the fabric care & home care segment to outshine all the other segments, and register organic sales growth of 6% year on year and net sales growth of 2% in the third quarter. The segment accounts for about 30% of the company’s net sales. The remainder comes from beauty, grooming, family care, health care, baby care and feminine care products, all of which posted organic sales growth of 2% or less and net sales declines of 2% or more.
Innovation and new product activity is especially important to accelerate market share growth in developed markets as they are saturating. Seven of the company’s products made it to leading market research company IRI’s list of top 10 non-food US consumer product innovations in 2013, with Tide Pods topping the list. Additionally, six products made it to their list of rising stars. P&G intends to continue innovating which should help drive market growth, a better product mix and market share increases, going forward.
Cost Savings Will Help Offset Currency Translation Losses
Unfavorable exchange rates reduced P&G’s gross margins in Q3 by 100 basis points. However, a 200 basis point improvement from manufacturing savings (resulting from restructuring program announced in 2012) helped it to absorb the impact. The 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 aims to save $6 billion in costs of goods sold through the program. It saved $1.2 billion in FY2013 and expects to save another $1.6 billion in FY2014, up by $200 million from the company’s last forecast. Moreover, P&G is redesigning its supply chain and distribution network through which it expects to save an incremental $200-$300 million annually over three to four years.
We believe these savings will continue to help the company in overcoming currency headwinds, thus providing increased support to gross margins. We think that gross margins can also expand as the company strives to lift its beauty division. Beauty is a higher margin business compared to other product categories such as fabric care and paper.