Articles for Procter & Gamble

P&G’s Gross Margins Supported By Cost Savings As Innovations Fuel Market Share Growth

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Wednesday, July 30th, 2014 by

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.

See our complete analysis of Procter & Gamble


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.

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Cost Savings Rescue FMCG Giants From Currency Woes

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Monday, June 2nd, 2014 by

In the last year or so, emerging market currencies such as the Brazilian Real (BRL), the Indian Rupee (INR), the South African Rand (ZAR), the Venezuelan Bolivar (VEB) and the Argentine Peso (ARS) have significantly depreciated relative to the dollar. This has negatively weighed in three ways on the operations of FMCG (Fast Moving Consumer Goods) majors, including Unilever, Procter & Gamble, Colgate-Palmolive and Kimberly-Clark. The first and the most significant impact is the slowdown that the currency devaluation has created in the emerging markets. Rapid currency depreciation creates inflationary pressure which forces consumers to reduce buying activity. The remaining two impacts relate to commodity costs and revenues. While inflation has pushed up the commodity costs, currency translation losses have reduced the revenues for the FMCG firms in dollar terms, thus squeezing the operational efficiency from both the ends. Cost savings have become an inevitable measure in such a business environment.

Despite the deceleration in growth, the developing economies continue to grow at higher rates than the developed world. In this article, we analyze the importance of the emerging economies for the four FMCG giants. We also discuss the key highlights of the savings initiatives presently being pursued by each of them to counter currency headwinds in the emerging markets. The common agenda behind the savings programs is to enhance gross margins while also freeing up more resources for investing back into advertising, marketing and brand building. The following table summarizes key metrics for the FMCG companies for 2013 that will be helpful in comprehending this article:

See Our Complete Analysis Of Consumer Stocks: Unilever | Colgate-Palmolive P&G | Kimberly-Clark

Unilever (NYSE:UL): Unilever’s above-market global growth in the last few years has come on its rapidly expanding presence in the emerging markets. The company achieves about 85% of its overall growth and slightly less than 60% of its total revenues from these markets. It intends to lift the revenue contribution of the emerging markets to 75% by 2020.

Unilever saved about €1.5 billion (less than $2 billion) through its cost savings program in 2013. Starting next year, the company expects to save an incremental €500 million ($684 million) annually. This is will be achieved via a combination of measures such as reduction in marketing headcount by 12% globally (mostly in slow growing economies such as the U.S.) and a 30% cut in the number of stock keeping units by the end of this year. The company will also focus on launching more high-margin products in the market to generate higher levels of income.

Our price estimate of $44 for Unilever is almost in line with the market price of the stock.

Colgate-Palmolive (NYSE:CL): Emerging market growth is a strategic priority for Colgate-Palmolive. The company derives more than half of its revenues from emerging markets such as Latin America, Africa and Asia. Its product portfolio in these countries is skewed towards oral care products, which generate more than 50% of total company sales. Colgate is also the oral care market leader in many of the emerging markets, including India and Brazil.

Colgate’s funding-the-growth initiative is helping it to more than offset higher raw and packaging material costs. Under the program, the company has opened new environmentally sustainable distribution centers to offer better service to its customers, while also reducing fuel and transportation costs. It is generating savings on indirect purchases by negotiating better lease terms with its current suppliers in several countries. It is also generating significant savings via raw material substitution, reduction of packaging material, and increase in manufacturing efficiency through reduction in the number of stock keeping units (SKU). In addition to cost savings from its funding-the-growth initiative, Colgate realized $40 million of after-tax savings in 2013 from its global restructuring program, and it expects to save double that amount in 2014.

Our price estimate of $59 for Colgate-Palmolive marks our valuation at a discount of about 10% to the stock’s market price.

Procter & Gamble (NYSE:PG): P&G’s products are usually priced at higher price points due to their premium quality. Therefore, its products witness higher demand in the developed economies than the emerging ones. The company derives less than 40% of its revenues from emerging markets. However, it is now looking to enhance its presence in these markets as they continue to grow at much faster rates than developed economies. The company registered organic sales growth of 8% in its top 10 developing markets in FY 2013.

P&G intends to make productivity its core strength. In recent years, the company 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. It saved $1.2 billion in cost of goods sold in FY2013 and is on track to save another $1.6 billion in FY2014, up by $200 million from the company’s last forecast. It is also redesigning its supply chain and distribution network through which it expects to save an incremental $200-$300 million annually over three to four years.

One significant area where the company is striving to reduce costs is energy consumption. In 2010, P&G revealed a sustainability program to drive 20% reduction in energy usage per unit of production by 2020. According to the company’s most recent sustainability report, it has reduced energy consumption by 8%, and continues to introduce energy management systems at new locations to save more energy. Although it is difficult to assess the precise impact of the energy savings, P&G is positive about saving millions of dollars by implementing the energy solutions.

Our price estimate of $70 for Procter & Gamble stands at a discount of over 10% to the market price of the stock.

Kimberly-Clark (NYSE:KMB): The emerging markets contribute less than 40% of Kimberly-Clark’s revenues since the company operates primarily in North America and Europe. Slowing growth and profits in these regions are pushing the company to hunt for more international opportunities. It is currently pursuing strong expansion in Latin America which is the primary factor driving sales growth across its segments. The company also recently completed a major restructuring operation which involved exiting the diaper business in Europe and channelizing resources towards better growth opportunities in China.

Kimberly-Clark aims to identify and deliver cost savings in fields where consumers are not much concerned via its FORCE (Focused On Reducing Costs Everywhere) initiative. The program delivered $310 million in cost savings in 2013, allowing the company to absorb currency translation losses and commodity cost inflation. Savings from the program also allowed the company to invest back into innovation and strategic branding. Kimberly-Clark expects significant currency headwinds and higher commodity costs this year. However, it also expects to save at least $300 million from the FORCE program which should help it overcome these problems.

Our price estimate of $110 for Kimberly-Clark is almost in line with its current market price.

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Innovation And Productivity Improvements Drive Procter & Gamble’s Quarterly Results

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Monday, April 28th, 2014 by

Procter & Gamble (NYSE:PG), 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 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.

The fabric care & home care segment outshined all the other segments, registering organic sales growth of 6% year on year and net sales growth of 2% (i.e., as reported). 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 productivity improvements mainly governed the company’s third quarter results, and we believe its focus on these will enhance its results in the next few quarters.

We have a $70 price estimate for P&G’s stock, about 15% lower than its market price. We are in the process of updating our model for the Q3 results.

See our complete analysis of Procter & Gamble

Innovation Will Fuel Market Share Gains

Innovation has been a core part of Procter & Gamble’s business strategy, and this has allowed it to become the market leader in consumer products. 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. Additionally, six products made it to their list of rising stars.

P&G’s recent launches in fabric care, such as Tide pods, Ariel pods and Gain flings, are gaining traction in the developed markets. The company also regained its leadership in baby care from Kimberly-Clark, as an improvement in absorbency, comfort and design across baby diapers in the U.S. helped grow its share in the country’s baby care market.

We think that innovation and new product activity hold the key to accelerating P&G’s market share growth in developed markets as they are saturating. P&G has more innovative products lined up for the current year, which should help drive market growth, a better product mix and market share increases, going forward.

Cost Savings Will Help Offset Currency Translation Losses

The company recently 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 approximately 1% growth, compared to the initial forecast of 1%-2% growth.

Unfavorable exchange rates had a 100 basis points negative impact on P&G’s Q3 gross margins. However, a 200 basis point improvement from manufacturing savings (resulting from restructuring program announced in 2012) helped it to absorb the impact. The motive 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. The company aims to save $6 billion in costs of goods sold through the program. It saved $1.2 billion in FY2013 and is on track to save another $1.6 billion in FY2014, up by $200 million from the company’s last forecast. Moreover, the company 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.

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Exchange Rates Will Act As Headwinds As P&G Expands Into Emerging Markets

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Tuesday, April 22nd, 2014 by

Procter & Gamble (NYSE:PG) is slated to release its results for Q3 FY2014 Wednesday, April 23. 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 Q2 FY2014, at the lower end of its annual guidance. While all other segments registered low- to mid-single-digit organic sales growth, beauty organic sales were essentially flat.

A decline in skin care sales and disproportionate growth in developing regions and mid-tier products, both of which have lower than segment average selling prices, resulted in a 0.4% market share loss in the beauty category for P&G in the second quarter. The company’s management is confident about turning around the segment through organic growth. P&G believes 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.

P&G’s beauty portfolio boasts of iconic brands like SK-II, Hugo Boss and Gucci. 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 the beauty market through innovations, supported by widespread marketing campaigns. We think that the company will continue to do so, which should help revive beauty segment sales.

We have a $70 price estimate for P&G’s stock, about 15% lower than its market price. We will update our model after the upcoming results are announced.

See our complete analysis of Procter & Gamble

Currency Headwinds Will Impact Fiscal Sales Growth

P&G recently 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.

Lately, many developing countries (such as Brazil, Russia, South Africa, Argentina and Turkey) have witnessed their currencies depreciate relative to the U.S. dollar. This has negatively weighed on the income statements and balance sheets of many American firms that have significant operations outside of the U.S. The currency devaluation has also created inflationary pressures on many markets, because of which buyers have reduced their consumption.

Towards the end of 2013, Unilever’s CEO, Paul Polman, announced at the World Wildlife Fund Duke of Edinburgh Conservation Awards that this slowdown in emerging economies will stay for a long period. P&G derives about 40% of its revenues from emerging markets, lower than its close rivals Unilever and Colgate-Palmolive. However, the company is now looking to enhance its presence in these markets as they continue to grow faster than developed economies. We believe that a prolonged slowdown could hamper P&G’s expansion plans, and consequently its growth trajectory.

Cost Savings Will Help Offset Foreign Exchange Losses And Higher Commodity Costs

P&G announced a restructuring program in 2012, through which it aimed to save $6 billion in costs of goods sold. The motive 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. In the previous quarter, P&G’s gross margin contracted by 90 basis points to 50% as its restructuring program helped it to partly absorb the impact of adverse geographic and product mixes, unfavorable exchange rates and higher commodity costs.

P&G saved $1.2 billion in cost of goods sold in FY2013 and is on track to save another $1.6 billion in FY2014, up by $200 million from the company’s last forecast. This should provide increased support to gross margins going forward. 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.

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How Will A Prolonged Slowdown Affect FMCG Stocks?

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Tuesday, March 25th, 2014 by

Fast Moving Consumer Goods (FMCG) companies (Unilever, Proctor & Gamble, Colgate-Polmolive and Kimberly-Clark) have benefited form global markets.  The demand for consumer products in emerging economies such as India, Brazil, China, South Africa and Russia has been increasing year on year due to rising per capita disposable income. These markets are expected to continue growing, albeit at a slower pace as they have become victims of rapid currency depreciation. Currency devaluation creates inflationary pressures which force consumers to reduce buying activity. In a recent article, we had discussed the major factors that are supporting Kimberly-Clark’s stock price amid a slowing emerging world. (Read: Here’s Why Kimberly-Clark Is Outperforming Other FMCG Majors)

In this article, we analyze how a prolonged slowdown would affect each of the Fast Moving Consumer Goods (FMCG) giants.

See Our Complete Analysis For Consumer Stocks Unilever | Procter & GambleColgate-Palmolive | Kimberly-Clark

Assessing The Impact Of A Prolonged Slowdown On Consumer Staples Stocks

Unilever: The contribution of emerging markets to Unilever’s total revenue currently stands at close to 60%. Despite the deceleration in growth, emerging markets continue to grow faster than the developed world. This is one of the key reasons why Unilever intends to lift the revenue contribution of emerging markets to three-fourth by 2020. The company has been shedding some of its food businesses in order to focus on home and personal care products. These two categories together generate half of the company’s total revenues and about 80% of its emerging market sales, and hence are most prone to emerging market volatility.

Unilever’s above-market global growth in the last few years has come on its rapidly expanding presence in the emerging markets. It achieves about 85% of its overall growth from these markets. Therefore, Unilever’s growth could slow significantly should the emerging market slowdown continue.

Our price estimate of $44 for Unilever marks our valuation at a premium of about 10% to its market price.

Procter & Gamble: P&G’s products are usually priced at higher price points due to their premium quality. Therefore, they witness higher demand in the developed economies than the emerging ones. The company derives less than 40% of its revenues from emerging markets.

P&G is trying to enhance its presence in these markets as they continue to grow at much faster rates than developed economies. The company registered organic sales growth of 8% in its top ten developing markets in FY 2013 (fiscal year ends in June). However, it also recently 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. We believe that a prolonged slowdown could hamper P&G’s expansion plans, and consequently its growth trajectory. (Read: P&G Lowers Sales And Profit Guidance On Currency Translation Woes)

Our price estimate of $70 for Procter & Gamble is at a discount of about 10% to the market price.

Colgate-Palmolive: Colgate-Palmolive derives more than half of its revenues from emerging markets such as Latin America, Africa and Asia. The company’s product portfolio in these countries is skewed towards oral care products, which generate more than 50% of total company sales. Colgate is also the oral care market leader in many of the emerging markets including, India and Brazil. Emerging market growth is a strategic priority for the company and may not yield expected results if the slowdown stays for a long duration.

Our price estimate of $59 for Colgate-Palmolive marks our valuation at a discount of over 5% to the stock’s market price.

Kimberly-Clark: Kimberly-Clark operates primarily in North America and Europe. Slowing growth and profits in these regions are pushing the company to hunt for international opportunities. Kimberly-Clark is currently pursuing strong expansion in Latin America. This is the primary factor driving sales growth for the company across segments. Kimberly-Clark is also going through a major restructuring operation, which involves exiting the diaper business in Europe and channelizing resources towards better growth opportunities such as the diaper market in China. We think that Kimberly-Clark may go light on its expansion plans if the slowdown continues, thereby lowering sales growth.

Our price estimate of $112 for Kimberly-Clark is almost in line with its current market price.

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P&G Lowers Sales And Profit Guidance On Currency Translation Woes

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Wednesday, March 5th, 2014 by

Procter & Gamble (NYSE:PG) recently 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. The world’s leading consumer goods company 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.

P&G expects the currency movement to also negatively impact core earnings per share growth. Core earnings include the effect of foreign exchange movements but exclude the impact of certain one-time charges. The company forecasts core earnings per share to grow in the range of 3%–5%, lower than its initial guidance of 5%–7% growth.

Lately, many developing countries such as Brazil, Russia, South Africa, Argentina and Turkey have witnessed their currencies depreciate relative to the US dollar. This has negatively weighed on the income statements and balance sheets of many American firms that have significant operations outside of the U.S. The currency devaluation has also created inflationary pressures on many markets, because of which buyers have reduced their consumption.

Towards the end of 2013, Unilever’s CEO, Paul Polman, announced at the World Wildlife Fund Duke of Edinburgh Conservation Awards that this slowdown in emerging economies will stay for a long period. P&G derives about 40% of its revenues from emerging markets, lower than its close rivals Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL). However, the company is now looking to enhance its presence in these markets as they continue to grow faster than developed economies. We believe that a prolonged slowdown could hamper P&G’s expansion plans, and consequently its growth trajectory.

Our price estimate of $70 for Procter & Gamble’s stock marks our valuation at a discount of about 10% to the current market price.

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

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Monday, January 27th, 2014 by

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.

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.

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. 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.

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.

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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Emerging Markets Will Continue To Lead Procter & Gamble’s Growth, Beauty Has A Moderate Outlook

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Wednesday, January 22nd, 2014 by

Procter & Gamble (NYSE:PG) posted a 4% year-over-year increase in organic sales (excludes the impact of acquisitions/disposals and foreign currency movements) in Q1 FY 2014, at the higher end of its guidance, on the back of 8% organic sales growth in the emerging markets.(Fiscal years end with June.)  While the company’s fabric & home care segment, and baby, feminine & family care segment each registered organic sales growth in excess of 5% year over year, its beauty, grooming and healthcare segments under-performed with only 0-1% increase in organic sales. For further insights on P&G’s Q1 FY 2014 performance, read our article: Procter & Gamble Marks A Healthy Start To The Fiscal Year Despite Slow Growth In Beauty

P&G is set to release its earnings for Q2 FY 2014 on Friday, January 24th. We expect the company to post organic sales growth in the range of 3% to 5% led by the emerging markets. However, this will translate into lower net sales growth due to foreign exchange losses pertaining to currency weaknesses in the emerging economies. We also expect the company to post an increase in gross margins driven by its efforts to cut costs.

Our price estimate for Procter & Gamble’s stock stands at $73, about 10% lower than its market price.

P&G Is Trying To Get Beauty Division Back On Track

About 25% of P&G’s revenues come from beauty products. The company’s beauty portfolio includes iconic brands like SK-II, Hugo Boss, Dolce & Gabbana, Gucci, Lacoste, James Bond 007, Head & Shoulders, Olay and Pantene.

Despite being a major competitor in the global prestige beauty and fragrance market, the company’s beauty organic sales increased by only 1% year over year in Q1 FY2014 due to heavy competitive product and promotional activity. Some of P&G’s beauty products performed weaker than others in the quarter. For instance, while personal cleansing, cosmetics and deodorants witnessed healthy organic sales growth, skin care sales declined during the quarter. The management feels that its salon professional business also requires increased focus.

P&G is trying to bring its beauty business back on track. It has built a strong pipeline of innovations with many launches expected in the third quarter. Earlier this month, the company announced the launch of a new ad campaign for Olay (P&G’s premium beauty brand) that spans across its boutique brands. It has also brought back A.G. Lafley on board as the new CEO. Under his leadership during 2000–2009, the company 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.

Based on these factors, we estimate P&G will gain share in the beauty market going forward. However, the increase will be marginal 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.

Cost Savings And Restructuring Activities To 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 goods sold, marketing expenses and non-manufacturing overhead. The program helped the company to save $1.2 billion in cost of goods sold in FY 2013.

Reducing energy costs is one area where P&G has done well. 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.

See our complete analysis of Procter & Gamble

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Procter & Gamble Seems To Be On Track To Achieve Its Cost Savings Target

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Wednesday, December 18th, 2013 by

According to a report published by Bloomberg on December 13, Procter & Gamble (NYSE:PG) is planning to restructure its overseas business units. Under the restructuring program, the world’s largest consumer products manufacturer will merge its Eastern and Central European unit with the Western European unit, while its Indian business will be merged with the Middle East and Africa unit.

P&G presently has five geographic units—North America, Latin America, Western Europe, Asia and CEEMEA (includes Central and Eastern Europe, Middle East and Africa). The company will have an unchanged number of geographic units post the restructuring program. Although P&G has not yet made any official announcement regarding the undertaking of the program, the company should unveil the plan in 2014 according to the report. The program will help P&G to accelerate sales growth and cut costs if it is undertaken, thereby providing room for investment in other initiatives.

Our price estimate for Procter & Gamble’s stock stands at $73, about 10% lower than its market price.

See our complete analysis of Procter & Gamble

Increasing Productivity Is Top Priority For P&G

P&G intends to make productivity its core strength. In recent years, the company 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.

One significant area where the company is striving to reduce costs is energy consumption. In 2010, P&G revealed a sustainability program to drive 20% reduction in energy usage per unit of production by 2020. According to P&G’s most recent sustainability report, the company has reduced energy consumption by 8%, and continues to introduce energy management systems at new locations to save more energy. Although it is difficult to assess the precise impact of the energy savings, P&G is positive about saving millions of dollars by implementing the energy solutions.

So far P&G has managed to save about $1 billion under its five-year savings program. The restructuring of overseas business units will bring the company one step closer towards achieving its savings target of $10 billion. It will be able to reduce costs related to back office and logistics and distribution. It will also see acceleration in sales via streamlined management decision making and manufacturing process.

Cost Savings Could Be Used To Fund Expansion Initiatives

P&G is currently underweight on the emerging markets compared to its competitors Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL). About 40% of P&G’s sales come from fast growing emerging markets, while Unilever and Colgate generate over 50% of sales from these markets. Therefore, it is to no surprise that in recent quarters P&G has increased its focus towards expansion in the emerging markets. In our view, the cost savings could help the company to fund its expansion plans by allowing it to invest back in innovation and increase the advertising support for its products.

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Procter & Gamble Marks A Healthy Start To The Fiscal Year Despite Slow Growth In Beauty

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Tuesday, October 29th, 2013 by

Procter & Gamble (NYSE:PG), the world’s leading consumer goods company, posted 4% y-o-y rise in organic sales (excludes the impact of acquisitions/disposals and foreign currency movements) in Q1. This was at the higher end of its guidance due to strong organic sales growth (8%) in the developing economies. Overall, while volumes increased 4% y-o-y, other forces such as pricing and mix were essentially neutral.

Net sales increased 2% y-o-y to $21.2 billion, as currency headwinds in Japan, Venezuela and some of the key emerging markets, offset the impact of organic sales growth by 2%. The company’s net income rose 8% to $3 billion, benefiting from lower selling, general and administrative expenses, and lower tax rates.

P&G’s fabric & home care segment and baby, feminine & family care segment delivered organic sales growth in excess of 5% y-o-y, while beauty, grooming and healthcare segments underperformed with only 0-1% increase in organic sales. P&G derives close to 25% of its revenues from beauty products. The lackluster performance of the beauty division has been stirring concern among investors, suggesting that more needs to be done in beauty.

Our current price estimate of $74 for Procter & Gamble marks our valuation at a discount of about 10% to the market price.

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Beauty Division Could Rejuvenate With New Product Additions

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. Organic sales in beauty increased only 1% y-o-y in Q1 FY 2014, as 2% y-o-y higher volumes were offset by 1% impact of unfavorable geographic and product mix.

Some of P&G’s beauty products performed weaker than others in Q1. For instance, while personal cleansing, cosmetics and deodorants witnessed healthy organic sales growth, skin care sales declined during the quarter. The management feels that its salon professional business also requires increased focus.

We expect the appetite for premium brands among consumers to increase as the global economy recovers. Additionally, P&G has built a strong pipeline of innovations that should help it bring the business back on track. The management conveyed that these innovations will be brought to the market in Q2 and Q3, although it did not give any further details on the launches. P&G’s efforts should help revive the beauty division; however, high promotional activity from competitors ahead of these launches could hold back growth.

Based on the above mentioned factors, we estimate P&G’s beauty division will gain market share in the future. 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.

Gross Margin Likely To Expand In The Future

P&G announced a restructuring program in 2012 through which it aimed to save $10 billion in costs. Under this program, the company will save $6 billion in costs of goods sold, while another $1 billion and $3 billion, from marketing efficiencies and non-manufacturing overhead, respectively. Like previous quarters, P&G’s cost-saving initiative supported the company’s gross margins in Q1.

Core gross margin, excluding the effects of one-time costs and restructuring activities, fell by 1.3% in Q1 to under 50%. This was the result of 1.6% increase in cost-savings being offset by geographic and category mix, foreign exchange, higher commodity costs and higher manufacturing start-up costs. The main impact was from expansion into lower margin geographies and product categories that reduced core gross margin by 1.4%.

P&G is working to reduce cost structures in the developed markets that will help it cut down costs and inventory. The company delivered cost-savings ahead of its plan in FY 2013, and has increased its full year expectations for cost-savings in FY 2014 from $1.2 billion to $1.4 billion. This should provide increased support to gross margins going forward. Moreover, as the company strives to lift its beauty division, we think that gross margins will expand as beauty is a higher margin business compared to other product categories such as fabric care and paper.

We are in the process of updating our $74 price estimate for Procter & Gamble based on the Q1 FY 2014 results.

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