Articles for Procter & Gamble

P&G Posts Lackluster Q1’15 Results; Duracell Sale Creates Hope Of A Revival

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Tuesday, October 28th, 2014 by

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.

See our complete analysis of Procter & Gamble

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.

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P&G Q1’15 Preview: Markets Slowdown And Currency Headwinds Should Test P&G Brands

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Thursday, October 23rd, 2014 by

Procter & Gamble (NYSE:PG) is scheduled to report its Q1FY15 results on October 24. Last fiscal year, sales for the world’s largest consumer goods company stood at $83 billion, marginally higher than sales from fiscal year 2013. (Fiscal years end with June.)  Company-wide product volumes witnessed a 3% growth in FY14 while currencies had a negative impact of 2% during the period. P&G’s two largest business units (fabric & home care and baby, feminine & family care) had the highest growth rates in volumes across all business units. Product volumes from the fabric care business segment registered a 5% growth rate. Similarly, the baby, feminine and family care business unit registered a 4% growth in year on year volumes. However, growth in these business units in reported terms was restricted by currency headwinds, which had a negative 3% impact.

Growth in the remaining business units of beauty, grooming and health care was tepid, weighed down by weak market conditions in developed and emerging economies. The weakness in these business units was further attenuated by P&G’s many underperforming brands. Recently, The Wall Street Journal reported that P&G plans to sell more than half of its 200 brands to focus exclusively on profitable brands. We expect to gain more clarity on this from the upcoming earnings conference call. Despite the weak top line performance, due to extreme currency volatility, P&G has managed to expand its margins on a year-on-year basis through prudent reductions in manufacturing and non-manufacturing overhead expenses. The operating profit margin for FY14 stood 1 percentage point higher over FY13, at 18.4%. Similarly, the net earnings margin (from continuing operations) expanded 40 basis points to 14.1% in FY14.

The company has an ambitious five-year plan lasting until fiscal year 2016 and expects to cumulatively save about $10 billion in cost of goods sold, marketing expenses and non-manufacturing related overhead. It saved $1.2 billion in cost of goods sold in FY2013 and delivered on its earlier guidance of saving $1.6 billion in cost of goods sold in FY2014. We expect to see additional cost savings on these fronts that should create margin accretion in FY15.

See our complete analysis of Procter & Gamble

Sluggish Developed Markets to Weigh on Results

Last fiscal year, the U.S. accounted for more than 35% of total P&G sales and registered a meager 0.7% year on year growth. Comparatively, its International markets portfolio fared better in FY14, although reported sales only grew 0.6% year on year. This is because the reported sales from International economies were significantly depressed from currency fluctuations in these markets in FY14. P&G’s geographic portfolio is also skewed towards developed economies, unlike its competitors. North America and Western Europe alone accounted for 57% of total FY14 sales. This proportion for other U.S. based FMCG (i.e, Fast Moving Consumer Goods) majors such as Kimberly-Clark and Colgate stand at 50% and 44% year to date in 2014.

Although the domestic U.S. market looks to be gaining momentum, it is yet to deliver on results. In its latest quarterly presentation released October 23, 2014, Unilever reported that the North American market for FMCG products grew 1% on a year on year basis. Market growth in Europe however was much disappointing and declined by over 2% last quarter due to significant price deflation in FMCG products. We expect tepid sales from P&G’s developed markets portfolio, weighed down by sluggish market growth and contracting economies. P&G has already witnessed a slowdown in its beauty product portfolio, especially among hair care, hair color and facial care products in developed markets.

Unfavorable Mix Could Curtail Emerging Market Volume Growth

In addition to slowing sales in developed markets, P&G has not been able to capitalize on its success in emerging markets due to its large brand portfolio. Volumes from markets excluding North America and Europe have remained robust. However, the proportion of overall sales from high growth markets such as Asia and Latin America have remained at 18% and 10%, respectively, for the last three fiscal year periods. We believe the reason for slacking sales, despite a surge in volumes, is an unfavorable mix of products in these markets.

For example, within fabric care, P&G has registered a high single-digit growth in volumes from developing markets and a low single-digit growth in volumes in developed markets. Despite this volume expansion, market share was flat in FY14. Likewise, P&G home care volumes in developing and developed markets in FY14 grew in the same range as fabric care last fiscal year. This resulted in a 50 basis point increase in market share in home care in FY14. Health care sales in FY14 faced a strong influence of unfavorable mix as geographic expansion in developing markets in low-priced product lines such as Vicks dragged down net sales. While in the long term, the expanding geographic reach of P&G products should lead to an acceleration in sales, unfavorable product-price mix could erode net sales in the near term.

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Week In Review: Procter & Gamble, Unilever, Colgate-Palmolive And Kimberly-Clark

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Monday, September 29th, 2014 by

Consumer Goods stocks had a mixed performance last week, with domestic U.S. players such as Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL) and Kimberly-Clark Corp. (NYSE:KMB) posting some gains from Monday, September 22 through Friday, September 26. U.S. consumer goods companies such as P&G, Colgate and Kimberly-Clark gained on Wednesday, September 24, after new home sales for August jumped 18%, the fastest since May 2008, signalling an improvement in consumer spending potential.

However, the Anglo-Dutch Consumer Goods major Unilever (NYSE:UL) declined 1.3% during this period, on the back of a broader market contraction on oil concerns in the European Union. The FTSE 100, of which Unilever is a constituent, declined 2.7% during the same period. Comparatively, the S&P 500, which includes P&G, Colgate and Kimberly-Clark as constituents, declined 1.4% this week.

Below, we cover key events from the past week for the above listed Consumer Goods companies.

Procter & Gamble

Shares of P&G started the week on a flat note and rose higher on the back of a rising market Wednesday, September 24. However, shares fell along with the market Thursday, September 25, shedding their gains through the week. Year-to-date, shares of P&G have posted marginal gains, with quarterly results weighed down by sluggish sales growth, particularly in the U.S. market. However, prudent cost savings programs have lent buoyancy to shares despite weak top line numbers.

We have a price estimate of $70 for Procter & Gamble, about 17% lower than its current market price of $84. Our full CY14 revenue estimate stands at approximately $84.7 billion, compared to a consensus FY15 estimate of $84.7 billion.

Unilever

Shares of Unilever declined the most among the four consumer goods companies. The weakness in Unilever’s shares continued after the company warned of slowing sales for the second half of 2014 on September 17. Additionally, macroeconomic factors from the European Union weighed on American listed ADRs this week, following oil concerns from the Russia-Ukraine fiasco. Year-to-date, Unilever’s shares fared similar to P&G shares, with sluggish top line performance offset by prudent cost savings to maintain earnings quality.

We have a price estimate of $47 for Unilever, about 12% higher than its current market price of $42. Our full FY14 revenue estimate stands at approximately $68.1 billion, compared to a consensus estimate of $66.68 billion. We expect non-GAAP earnings per share of $2.14 this fiscal year, compared to consensus estimates of $2.20.

Colgate-Palmolive

Colgate’s shares started flat this week and gained about 1.3% on Wednesday. However, shares pared down these gains on Thursday as part of a broader market contraction. The company recent quarterly earnings were a miss on revenues, and shares have remained subdued post these quarterly results on July 31,2014. Year-to-date, Colgate’s shares have remained flat.

We have a price estimate of $65 for Colgate-Palmolive, in line with its current market price. Our full FY14 revenue estimate stands at approximately $18.2 billion, compared to a consensus estimate of $17.6 billion. We expect non-GAAP earnings per share of $3.13 this fiscal year, compared to consensus estimates of $2.97.

Kimberly-Clark

Shares of Kimberly-Clark trended similar to the other consumer goods stocks, starting the week flat before gaining Wednesday, September 24 and declining Thursday, September 25. Year-to-date performance from Kimberly-Clark was relatively lack-luster, weighed down by sluggish domestic sales despite strong sales growth from International markets.

We have a price estimate of $112 for Kimberly-Clark, 4% ahead of its current market price of $107. Our full FY14 revenue estimate stands at approximately $21.7 billion, compared to a consensus estimate of $21.4 billion. We expect non-GAAP earnings per share of $5.93 this fiscal year, compared to consensus estimates of $6.09.

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P&G’s Brand Divestitures Should Unlock Greater Value

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Wednesday, August 27th, 2014 by

Procter & Gamble (NYSE:PG) is the world’s largest consumer goods company, with almost 200 brands in its portfolio. And it competes with other global consumer goods companies such as Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL). The company has a market capitalization of approximately $224 billion and annual revenues of about $83 billion in fiscal year 2014, marginally higher than sales from fiscal year 2013. Operating profit margins for FY14 stood 1 percentage point higher over FY13, at 18.4%. Similarly, net earnings margin (from continuing operations) expanded 40 basis points to 14.1% in FY14.

P&G classifies its extensive brand portfolio across five broad product categories, namely: 1) Beauty; 2) Grooming; 3) Health Care; 4) Fabric Care and Home Care; and, 5) Baby, Feminine & Family Care. In this note, we talk about key trends that could impact P&G’s business briefly.

We currently have a $70 price estimate for P&G’s stock, about 16% lower than its current market price.

See our complete analysis of Procter & Gamble

P&G Plans to Trim Portfolio as Consumer Spending Starts Recovery

The sheer size of its brand portfolio has been an issue for P&G in terms of sales growth. The company’s top 70 t0 80 brands make up about 90% of net sales and over 95% of net profit, with the remaining 120 to 130 brands contributing a minimalistic 10% to net sales for the company. However, declining consumer spending in developed markets after the economic crash, combined with inflationary pressures in emerging economies created a weak sales environment globally for consumer goods companies, resulting in a greater emphasis on bottom line through cost savings. The higher emphasis on its earnings growth has led to a deferral in shedding underperforming brands for P&G.

In this regard, P&G has planned an ambitious five-year plan lasting until fiscal year 2016 and expects to cumulatively save about $10 billion in cost of goods sold, marketing expenses and non-manufacturing related overhead. It saved $1.2 billion in cost of goods sold in FY2013 and delivered on its earlier guidance of saving $1.6 billion in cost of goods sold in FY2014. However, more recently, the company announced its intention to shed close to 100 brands that have minimal contributions to P&G’s top line in a bid to accelerate sales growth in the improving global economy.

This strategy should bode well for P&G’s sales, with the savings from discontinuing underperforming brands being reinvested into expanding operations in high growth markets. P&G derived about 43% of FY14 sales from Asia, Central and Eastern Europe, the Middle East, Africa and Latin America combined. Comparatively, the contribution from emerging and frontier markets is much higher for its competitors, such as Unilever and Colgate Palmolive. Despite the recent currency depreciation in emerging economies that has created inflationary pricing pressures on consumers, uptake of consumer goods and products remains higher in emerging markets compared to developed economies and should attract P&G into enhancing its position in these markets.

Portfolio and Manufacturing Streamlining Could Improve Sales and Margin Growth

As a percentage of revenues, P&G generates about 32% of its sales from the Fabric and Home Care segment, 25% from the Baby, Feminine and Family care segment, and 24% from its Beauty segment. Grooming and Health Care segments constitute smaller revenue shares for P&G, at 10% and 9%, respectively, in fiscal year 2014. The Fabric, Home and Pet Care unit is also P&G’s most valuable segment, accounting for approximately 28% of overall value. Its Beauty segment comes second in the value chain, contributing about 22.5% to P&G’s business.

In Q3FY14, the company completed its sale of the Pet Care business unit to Mars Incorporated for $2.9 billion. P&G’s CEO, AF Lafley, stated that exiting the pet care business was an important part of the company’s overall strategy to focus its product portfolio on the core businesses that provide the most value for consumers and shareholders. We are presently adjusting our P&G model to reflect the sale of its pet care business. However, the divestiture should have marginal impact on the divisional valuation, given that the pet care sales in fiscal year 2014 accounted for a meager 0.9% of overall revenues.

Additionally, the company plans to combine business units and redesign its supply chain system so as to save between $200-$300 million annually over three to four years. P&G plans to reduce its manufacturing footprint from many, single product plants into fewer, multi-category plants that have common manufacturing platforms. Last fiscal year, P&G’s unit volume sales increased 3%, driven by mid-single-digit increases in volumes of its two largest divisions. Unit volumes increased low single digits for Grooming and Health Care segments, while Beauty products had negligible growth in volume sales.

Shedding underperforming brands, streamlining manufacturing operations, and innovating further with its billion dollar brands across business units should take P&G growth higher going forward. 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 U.S. consumer product innovations in 2013. P&G’s recent launches in fabric care, such as Tide Pods, Ariel Pods and Gain Flings, are gaining traction in the developed markets and should be able to lift a nimbler P&G higher post the brand divestitures.


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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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