P&G Q4 Earnings Preview: With Brand Consolidation Coming to a Close, What’s Next for P&G?

Leading consumer processed goods company Procter & Gamble (NYSE:PG) is scheduled to report its fiscal 2015 fourth quarter earnings on July 30th. (P&G follows July-June fiscal year) With the recently announced $12.5 billion blockbuster sale of a large chunk of its beauty business, P&G successfully achieved the target of finalizing all major brand divestments by the end of fiscal 2015. Consequently, we believe that for once investors are likely to focus more on P&G’s future strategy rather than the fourth quarter results this earnings season.

Regardless, this doesn’t mean that the fourth quarter results will escape scrutiny. Like other US-based global consumer processed goods companies, P&G’s revenues and margins are likely to be dragged down by adverse currency movements. Additionally, the heavy transaction costs P&G would have incurred due to the brand divestments are likely to further burden P&G’s GAAP profits in the fourth quarter. The improvement in margins and growth rate expected as a result of the brand consolidation program are not likely to be realized until the divestments are completed, which could take more than a year. ^[1]

Our price estimate of $78 for Procter & Gamble is nearly the same as its current market price.

See our complete analysis for Procter & Gamble here

Will Volume Growth Finally Overcome Sluggish Consumption and Incessant Price Hikes?

P&G failed to expand its volumes in each of the first three quarters of fiscal 2015. While volume growth remained flat in the first and second quarters, volumes actually contracted by 2% year on year in the third quarter. In contrast, pricing growth was 1% in the first two quarters and 2% in the third quarter. This clearly illustrates that P&G is faltering in its pricing strategy by attempting to counter currency headwinds with indiscriminate price hikes. We believe that such unrelenting upticks in pricing are driving away P&G’s customers to cheaper alternatives offered by its rivals. (Read: P&G Reports Moderate Q3 Results, Lays Out Future Growth Strategy)

P&G has stated that it is managing the currency challenge through “a combination of pricing, mixed enhancement and productivity cost savings and by pursuing opportunities on brands in countries and regions unaffected by FX”. ^[2] However, overt reliance on the pricing component of this strategy could lead to another quarter of declining volumes. Unless P&G reigns in its price hikes and finds a balance between pricing and volume growth, it is unlikely that the company will be able to achieve meaningful organic revenue growth.

No End to Currency Woes in Sight

Adverse currency movements dragged down P&G’s net profit after tax by a cumulative $1.2 billion over the first three quarters. Another $300 million is expected to be added to the tally in the fourth quarter, bringing the total impact of currency headwinds on profit after tax to $1.5 billion in fiscal 2015. ^[2]

So far, P&G has been able to shore up the margins against sustained currency headwinds through substantial savings in SG&A expenses. However, as mentioned above, P&G’s revenues have suffered heavily from unfavorable currency movements. Over the first nine months of fiscal 2015, currency headwinds dragged down P&G’s revenue growth by 5 percentage points. The company has not been able to battle the problem effectively so far, as attempts to offset currency headwinds by price hikes have resulted in volume erosion.

What’s Next for P&G?

The $12.5 billion sale of 43 beauty brands brought a major chapter in P&G’s history to a close. With the brand consolidation program behind it, P&G will start the next fiscal year afresh as a slightly smaller but much more streamlined company. Helming this new era for P&G will be the recently announced new CEO, David Taylor, while the current Chairman and CEO A.G. Lafley will continue in an advisory role as Chairman. The new CEO is going to have his hands full, guiding P&G through the complex and drawn-out process of seeing the brand divestments to a successful completion. He will also lead P&G’s new three-pronged cost saving program, which includes 18 new manufacturing sites in developing markets, supply chain transformation in the US, lower marketing expenses. Investors will be keen to learn more details regarding the executive transition and P&G’s future strategy in the fourth quarter earnings call.

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More Trefis Research

1. P&G Press Release, July 9, 2015 [↩]
2. Procter & Gamble Fiscal 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, April 23, 2015 [↩] [↩]