Procter & Gamble (NYSE:PG) announced its earnings for the first quarter of FY 2013 on October 25. The consumer goods giant reported y-o-y organic sales growth of 2% driven primarily by price increases. Net sales fell 4% however due to a negative impact of 6% from a strengthening dollar. Total volumes remained flat with declines in the Beauty and Grooming segment volumes offset by growth in Baby Care & Family Care. Cost saving measures helped an improvement in core gross and operating margins.
Outpaced by competitors due to decreased focus on developing regions
P&G’s management has come under increased scrutiny lately and has tried to turn around the company’s declining global market share and improve profitability through a comprehensive plan which will direct focus towards the top 40 businesses, the 20 biggest new products and the top 10 emerging markets.
It has also been focusing more on the developed markets where the company has faced declining volumes due to market share losses and adverse economic conditions. A byproduct of this shift in strategy is a weaker performance in the developing regions. Competitors Kimberly-Clark (NYSE:KMB) and Unilever (NYSE:UL) have taken advantage of this and have reported stronger results in developing markets this quarter.
Growth in Baby Care & Family Care driven by innovation and product launches
The Baby Care & Family Care segment, which includes brands such as Bounty, Charmin and Pampers, saw overall volume growth of 2%. Baby Care saw strong growth in India and China driven by a growth in the market for these products and product innovation. Family Care has performed well in North America with mid-single digit volume growth driven by the launch of new products such as Charmin DuraClean and increased investment in marketing of the Charmin and Bounty brands.
Baby Care & Family Care has been the company’s best performing division this quarter. Pricing increases, along with an approximately flat growth in volumes and market share, drove a 3% growth in organic sales for the division. Net sales fell 2% however, primarily due to a stronger dollar.
We currently project Baby Care & Family Care’s global market share to remain at a similar level over the course of our forecast period. However, there could be a significant upside to this going forward, considering competitor Kimberly-Clark’s recent announcement that it is exiting its diapers business in Central and Southern Europe in order to focus more on emerging markets.
Margin growth from cost savings and productivity improvements
Earlier this year, P&G outlined a restructuring plan to reduce costs by $10 billion by 2016. The company incurred over $700 million in restructuring expenses during the previous financial year and has estimated total expenses of $3.5 billion by the end of fiscal 2015. Almost half of this amount is expected to be incurred this fiscal year.
The company is already beginning to see results. Cost savings and productivity boosted core operating margins by 90 basis points with gains from cost savings, price increases and a decrease in core SG&A costs partially offset by an unfavorable mix and a modest negative impact of commodity costs. The company expects core operating margin growth in the range of -2 to 3% in FY 2013, building on margin gains from the previous two quarters.
We will be updating our $69 price estimate for P&G based on the earnings release.