Long-Term Strategy in Focus in P&G’s Q3 Results

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PG: Procter & Gamble logo
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Procter & Gamble

Global consumer processed goods powerhouse Procter & Gamble (NYSE: PG) is scheduled to report its fiscal 2015 third quarter results on April 23rd. (P&G follows July-June fiscal year.). P&G is currently going through a historic phase, with its ambitious brand consolidation program in full swing. Further, the company’s CEO A.G. Lafley is reportedly on the way out and may vacate the post this year. [1]

Given the momentous nature of the strategic changes underway at Procter & Gamble, for once the company’s financial results may well take the back seat. Rather, investors will be keenly looking for information on P&G’s rumored divestments in its beauty unit, the succession plan following Lafley’s possible departure, and the company’s future/ strategy post-completion of the brand consolidation program.

On the financials front, P&G’s revenues are expected to decline in the third quarter owing to unabated currency headwinds. The company expects adverse currency headwinds to drag down revenue growth in fiscal 2015 by 5 percentage points. [2] Consequently, consensus revenue estimates for the third quarter stand at $18.44 billion, a decline of 10.3% compared to the same period previous year. Consensus EPS estimates for the third quarter is $0.92, down 8% from $1.00 a year ago.

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We have a price estimate of $83 for Procter & Gamble, which is nearly the same as its current market price.

See our complete analysis for Procter & Gamble here

Brand Consolidation Strategy in Focus

Since the last few quarters, Procter & Gamble has taken the quarterly earnings as an opportunity to expound on its brand consolidation strategy and the updates thereof. In light of the recent developments pertaining to brand sales, investors will be closely watching P&G’s third quarter results for updates regarding the issue. It should be noted that P&G has so far not confirmed rumors that it has commenced the sale process for some of its beauty brands. (Read: P&G Just Made Its Biggest Move So Far Under The Brand Consolidation Program)

Further, CFO Jon Moeller had stated in the Consumer Analyst Group of New York (CAGNY) conference call in February that P&G expects to identify all brands to be divested by this summer. (Read: P&G Expects Brand Consolidation to be Over by Summer) With this self-imposed deadline fast approaching, it is likely that the company will use the quarterly results to provide further information on brands due for divestment.

Currency Headwinds to Play Spoilsport

In the second quarter, adverse foreign currency movements depressed Procter & Gamble’s revenues by 5 percentage points. The total foreign exchange impact on the bottom line was to the tune of $450 million in the second quarter alone; and the cumulative effect in the current fiscal year is estimated to be at $1.4 billion. (Read: Falling Volumes Compound P&G’s Problems as Currency Headwinds Dampen Q2 Results) The company has itself indicated that currency volatility in Russia, Ukraine, Venezuela, Argentina, Japan and Switzerland remains a major cause of concern.

As a result, P&G’s third quarter results are expected to be weighed down by substantial negative impact of currency movements. The company’s unmatched exposure in such emerging markets makes it far more susceptible to volatility in foreign currencies than its competitors. This results in a disproportionate impact on P&G’s financial performance vis-à-vis rivals like Unilever (NYSE: UL).

Balance Between Price Hikes and Volume Growth Will Determine Organic Revenue Growth

In the second quarter, P&G achieved positive year on year volume growth in only one of its business units, Fabric Care and Home Care. Volumes in all other segments either remained flat or declined year on year. In contrast, P&G achieved pricing growth in each of its segments with the exception of Health Care, which remained flat.

The company resorted to higher prices in an attempt to counter commodity cost inflation and currency headwinds. However, the indiscriminate increase in pricing may have resulted in driving customers away from P&G’s products to lower priced alternatives offered by its competitors. Despite this apparent imbalance, the company stated that further price upticks may be on the cards in developing markets. However, no such price hikes were planned in the developed markets.

In light of the above, it is clear that P&G’s organic revenue growth will be determined by how well the company managed price hikes alongside volume expansion. Considering the sluggish consumption in developed markets, any meaningful volume growth is likely to come from developing markets only. However, developing markets are much more sensitive to changes in prices in comparison to developed markets. Therefore, if P&G continued increasing prices in developing markets in the third quarter, it may have suppressed volume growth during the period.

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Notes:
  1. P&G CEO Lafley Lays Groundwork for Exit, The Wall Street Journal, April 13, 2015 []
  2. Procter & Gamble 2015 Second Quarter Earnings Call Transcript, Seeking Alpha, January 27, 2015 []