Procter & Gamble’s Q4’16 Earnings: Organic Sales Driven By Higher Volumes

The manufacturer of leading brands like Gillette, Tide, Oral B and Pantene, Procter & Gamble (NYSE:PG) released its earnings on August 2nd. The company reported an increase in organic sales, primarily because of increased organic shipment volumes. However, net sales were down because of currency effects and the de-consolidation of Venezuelan operations. The company beat the street estimates of revenues, lifted by better-than-expected consumer demand in many regions of the world, including China. There has been a significant increase in marketing and innovation budgets for P&G, which had a short term negative impact on its core EPS this quarter.  Still, it should strengthen its market base on a longer term basis as the competition in the consumer industry is growing. Due to this reason, we believe, that company’s organic sales and core earnings might stabilize in FY’17 , and could continue increasing when the benefits of higher R&D and divestitures of non performing brands start reaping in the longer term.

See our complete analysis for Procter & Gamble

Higher R&D And Marketing Expenses Can Help Ease Competition

• One of the primary reasons for P&G’s slowdown can be attributed to the fact that its R&D to net sales percentage declined from over 4% in mid 90’s to around 2.4% earlier this decade ((Bloomberg)), and it seems the company intends to reverse this trend as this figure has gone up consistently in recent past from 3.6% in 2013 to 4.1% in 2015 and continues to increase in 2016.
• P&G is facing fierce competition from Kimberly Clark in the diapers segment, and recently Unilever has bought Dollar Shave Club to better compete with P&G’s Gillette. An increased focus on innovation can equip P&G to tackle the increased competition.
• Innovation can also help P&G to maintain its premium segment market which has higher margins as compared to the cheaper products.

Low Share In Emerging Markets Offers A  Huge Untapped Potential

• 66% of the P&G’s revenue share last year came from developed markets and only 34% came from emerging markets. On the other hand, its competitors like Unilever, Kimberly Clark and Colgate have higher revenue shares coming from the emerging markets.
• This is another reason for slowdown in P&G’s growth in recent years. Driven by population, the emerging markets can offer better and faster growth opportunities.
• This also leaves a huge unaddressed market for P&G, which if tapped properly can inflate the top-line of the company immensely.

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