Last week, Procter & Gamble (NYSE:PG) cut its earnings forecast and outlook for the current quarter. The news fueled another round of investor worries, after its April Q3 results and market share losses in several of its core markets, in contrast to better growth from competitors like Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL). As a result, the P&G stock has declined by about 10% in the last two months. As the consumer giant realigns its strategy to reclaim market share and margins, it would require strong execution to achieve the targets.
Tough Time for P&G
P&G now expects its Q4 sales to decline by 1-2%, in contrast to the 1-2% sales growth expected previously. This will happen as the consumers company rolls back its price increases amid market share losses and demand sluggishness in developed markets as well as unfavorable currency exchange rates.
P&G expects over 4% loss in sales value due to adverse currency exchange rates this quarter as the emerging market currencies post their biggest declines since almost 1998. Hasty emerging markets expansion amid high input commodity costs and supply chain shortages have increased costs and brought a sharp decline in P&G’s operating margins over the past 3 years. This has caused the company-wide EBITDA margin to decline from 27% in 2009 to 24% in 2010 and down to 22% in 2011.
Since then, P&G has since significantly realigned its strategy to take a more measured approach toward expansion in emerging markets and adding new country-product categories. It is now focusing on reclaiming its market share in the top 40 country-product segments that generate more than half of its sales. At the same time, it has also set an ambitious target to cut its costs by $10 billion by 2016 by cutting back spending in emerging markets.
However, P&G has a tough job at hand trying to rebuild market share in core segments while cutting down costs. While the strategy looks good on paper, a lot depends on the management’s capability to execute. At the same time, the diversion of the company’s attention from emerging markets is sure to benefit competitors like Unilever, Colgate-Palmolive and local/regional players. Interestingly, despite its put-on-hold strategy for further emerging markets expansion, P&G recently announced plans to construct a $250 million plant in Nigeria, in line with its previous focus on Africa as a key market for expansion.
We are currently revising our $70 Trefis price estimate of P&G’s stock.