Procter & Gamble Likely To Reap Marketing Benefits in Q1’17 As Macros Continue To Be Hostile

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Procter & Gamble

The world’s leading FMCG company Procter & Gamble (NYSE:PG) will report its Q1’17 earnings on 25th October. P&G’s stock price fell 3.5% after Unilever (NYSE:UL) reported midling results in the wake of slow consumer demand and high commodity prices.  Clearly, therefore, markets are fearing a similar impact on P&G’s earnings. Although the above mentioned factors are likely to affect P&G’s earnings, but  the company’s large exposure to more stable developed markets (65% sales from developed regions) might save it from the volatility in the emerging markets which had a toll on Unilever’s earnings.  Also, it will be interesting to note how P&G’s increased marketing and R&D expense, combined with its divestiture strategy, affected its organic sales and volumes in Q1’17.  We believe these two factors might offset some of the pressure P&G faces economically.

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See our complete analysis for Procter & Gamble

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High Impact of Currency Headwinds

P&G derives 23% of its sales from Europe, and post Brexit, the Euro and Pound have weakened 4% and 17% respectively against the US Dollar. Therefore, P&G might experience a currency impact more than what Unilever experienced because the former has the larger share of its sales coming from the developed market as compared to the latter. On a positive note, this very fact might also protect P&G from the slowed down growth in emerging markets. According to World Bank forecasts, GDP growth in Latin America and Asia Pacific region is expected to slow in 2016 as compared to 2015, whereas it is likely to improve in the European regions, which is the stronghold of P&G.

Marketing and R&D Expenses Likely To Yield Results

P&G has been facing tough competition from local players as far as the innovation part is concerned. For instance, in the diaper segment, P&G is experiencing a fierce resistance in Asian markets from Japanese brands like Merries, Moonies and Goon, primarily due to the fact that the diapers by these brands are thought to be custom made for the skin type and fit of Asian babies. To tackle such issues, P&G has increased its R&D to net sales percentage from 2.6% earlier in this decade to 4.1% in 2015. This combined with larger spend on marketing yielded good results on the volume front in Q4’16 as all the five segments reported a rise in organic sales and organic volumes. The company is likely to reap more benefits of higher R&D and marketing expenses in this fiscal year, which might bring its growth on track.

Watch Out For Beauty Segment

In 2015, P&G divested 43 of its non performing beauty brands including Camay, Zest, Covergirl and Gucci. The positive impact of these divestitures was seen on the organic sales and volumes of the segment as both increased 1% in Q4’16. However, the constant currency net earnings from the beauty segment saw a massive 27% year-over-year decline due to the marketing investments. It will be crucial to watch how the segment performs in the coming quarters of FY 2017, as it will largely be a measure to the success of P&G’s divestiture and marketing strategy.

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