The world’s largest consumer goods company, Procter & Gamble (NYSE:PG), reported its Q1’15 earnings on October 24. (Fiscal years end with June.) Sales faltered against strong currency headwinds and ended marginally lower than Q1’14 sales, at $20.8 billion. Divisionally, P&G’s Healthcare and Baby, Feminine and Family Care segments registered positive growth in sales, supported by increasing volumes and selling prices respectively. However, the growth from these segments failed to add to net sales as other segments such as Beauty, Fabric & Home Care and Grooming witnessed declining sales during the quarter.
GAAP operating and net income margins were impacted by an impairment of intangible assets and goodwill relating to its Duracell brand, which P&G announced it would divest during the recent earnings call. Adjusting for these impairments, non-GAAP margins and earnings were in-line with estimates. Non-GAAP operating profit margin for P&G stood at 19.9% in Q1’15, marginally lower than the 20.1% in Q1’14. Non-GAAP earnings per share stood at $1.07 for the quarter, marginally ahead of $1.05 from Q1’14.
P&G Plans to Lighten Its Portfolio in Near Term
On the Q1’15 conference call, P&G Chief Financial Officer Jon Moeller indicated that over the next 18-24 months, management intends to create a faster growing, more profitable company that is far simpler to operate. While this is an operation of gigantic proportions, the intent is definitely a step in the right direction. P&G has close to 200 brands in its portfolio, and more than 120 of these brands account for a meager 10% of total sales.
The company recently decided to shed its Duracell battery business from core P&G, and is pursuing options to either sell it or spin it off into a separate entity as the situation warrants. Duracell, which primarily manufactures non-rechargeable alkaline batteries, has a strong foothold in emerging markets and commands a strong position in the non-rechargeable alkaline battery market. Last fiscal year, Duracell generated about $2 billion in sales for P&G.
Should the company begin divesting its underperforming brands strategically at accelerated pace going forward, P&G should be left with a much lighter and nimbler portfolio of 70-80 brands that are leaders in their industries, categories or segments. While this process of brand culling would increase near term pressure on earnings, it should be beneficial to both revenue growth rate and long term earnings, and maximize shareholder value.
Product Innovation Drives Market Share Gains
In the current quarter, P&G’s Healthcare and Baby, Feminine and Family Care segments reported positive revenue growth, supported by expanding volumes and increasing selling prices. Within the U.S., P&G launched broad-based product innovations in its baby care portfolio a year ago. These innovations have helped the company increase its U.S. diaper market share by three percentage points to 44% in Q1’15. Globally, P&G has a 35% share in the global diaper market, and intends to roll-out its product innovations from the U.S. into International markets later this year. Innovations such as Pampers Premium Care Pants, which has seen exceptional uptake in North America, will be rolled out in Russia. The company expects subsequent roll-outs of this particular line of products to add to P&G’s existing diaper portfolio and provide accretive equity advantages to the Pampers brand in key international markets.
Additionally, the Healthcare business unit benefited from the strengthening domestic U.S. market. P&G Healthcare segment primarily consists of nutritive supplement products and other discretionary nutraceutical products which witness a significant increase in volumes on the back of an improving macroeconomic environment. In July 2014, P&G extended its presence into allergy medication through its billion-dollar health care brand, Vicks, with the launch of QlearQuil. Similarly, the company launched a new bundle of Metamucil brand that emphasize on the brand’s current heart health, blood sugar and digestive health benefits in a new fiber bar form. Going forward, new innovative product offerings should drive growth in the health care market as the U.S. market for nutrition products expands from increasing discretionary income levels.