Procter & Gamble’s (NYSE:PG) stock has struggled since the company announced in its last quarter results that its market share and operating margins have taken a fall. Meanwhile, its competitors like Unilever (NYSE:UL), Kimberly-Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL) have fared better despite tough industry conditions with sluggishness in the developed markets and higher input commodity costs.
While P&G’s competitors have been able to successfully execute price increases, P&G has been the only major consumer company unable to register volume growth, and it also had to roll back some price increases to recover lost market share in its core markets. It also has recently announced plans to decelerate expansion in emerging markets until it stabilizes its core and most profitable businesses.
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Focus On Reversing Market Share And Operating Margin Declines
P&G’s volume growth has been depressed over the past few quarters due to sluggishness in developed markets while price increases to make up for rising input costs also contributed to a loss of market share. Sales grew by only 2% last quarter with flat volumes. In contrast, Unilever reported double digit sales growth, including a 3.5% organic volume growth and positive pricing, while operating in the same market conditions as P&G.
The company has also been facing criticism for declining margins over the past two years, with its EBITDA margin having slipped by more than 3 percentage points from 2009 to 2011. The trend continued last quarter as well, as gross margin continued to contract due to higher commodity costs and an unfavorable geographical mix, despite price increases. With continued demand weakness, high costs and price roll-back, the consumer giant has also lowered its fiscal 2012 outlook.
P&G recently announced plans to undertake a massive and ambitious $10 billion cost-cutting program to push up its operating margins, for which it is likely to incur approximately $3.5 billion pre-tax restructuring charges over the next four years. It has also decided to slow down its expansion expenditure in emerging markets, though without exiting any country-product category, to refocus efforts on rebuilding its market share and improve its operating results.
Based on our revisions to market share and operating margin forecasts, we currently have a $70 Trefis price estimate of P&G’s stock, 10% ahead of the current market price.