Focus on Completing Brand Divestments and Protecting Margins to Weigh on P&G’s Q1 Results
Leading consumer processed goods company Procter & Gamble (NYSE:PG) is scheduled to report its fiscal 2016 first quarter earnings on October 23rd. [1] (P&G’s fiscal years end with June.) The company is under pressure from investors to revive flailing revenue growth as P&G’s restructuring measures have not yielded immediate results. We believe that this is a transitional period for P&G and the company is positioning itself well for a resurgence in growth in the coming years. (Read: Can Procter & Gamble Return to Growth?) The brand divestments are expected to be completed in next calendar year. Until then, P&G is likely to underperform, and revenue and margin expansion is expected to remain sluggish.
Fiscal 2015 performance recap:
- Revenue declined by 5% and to reach $76.3 billion (1% growth in non-GAAP terms)
- Gross margin contracted by 10 basis points to 49.03% (30 basis points improvement in non-GAAP terms)
- Operating margin contracted by 280 basis points to 15.46% (unchanged in non-GAAP terms)
- Non-GAAP diluted EPS declined by 2% to $4.02
Our price estimate of $76 for Procter & Gamble is slightly higher than its current market price.
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See our complete analysis for Procter & Gamble here
Emphasis on Long-Term Value Creation Could Trump Short-Term Volume Growth
In the fiscal 2015 fourth quarter earnings call, CFO Jon Moeller heavily emphasized Procter & Gamble’s focus on value creation and cash generation. [2] This focus has led the company to put the completion of the brand consolidation program and protection of margin ahead of expanding volumes quarter to quarter. The brand divestments are currently underway and are expected to be completed in the second half of calendar 2016.
On the margins front, Procter & Gamble has paired a strong cost savings program with consistent price hikes to support profitability in the face of heavy currency headwinds. However, the sustained uptick in pricing has caused a slump in P&G’s volumes. (Read: P&G’s Near-Term Outlook Darkens as Volumes Drop in Q4) This trend is expected to continue in the first quarter as the company’s strategy is unlikely to have changed.
Margin Protection is the Sole Silver Lining in the Short Term
In the fourth quarter, non-GAAP operating margin remain unchanged despite a drag of 130 basis points from adverse currency movements. This speaks volumes about Procter & Gamble’s heavy emphasis on margin protection. As stated earlier, the company is protecting its margins through a combination of productivity improvements and price hikes.
P&G’s productivity improvement program has yielded commendable results in the last few quarters. Productivity improvements yielded a benefit of 330 basis points in the fourth quarter of fiscal 2015 alone. However, the entire benefit did not trickle down to the bottom line since P&G is reinvesting part of the cost savings into innovation and supply chain optimization. [2] This trend is likely to be present in the first quarter also.
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Notes:- P&G Investor Relations [↩]
- Procter & Gamble Fiscal 2015 Fourth Quarter Earnings Call Transcript, Seeking Alpha, July 30, 2015 [↩] [↩]