Procter & Gamble’s Q1 Results Indicate A Revival Of The Giant

The FMCG giant Procter & Gamble (NYSE:PG) reported its Q1’17 earnings on October 25th. P&G’s has seen its net sales decline in the last two fiscal years with CAGR of -6.3%, primarily due to currency headwinds and economic problems in Latin America and China. The Q1 results signal a return in P&G’s growth as the company’s organic sales grew by 3% and net sales remained flat despite tough macro conditions. In comparison, the company’s key competitors Unilever (NYSE:UL) and Kimberly Clark (NYSE: KMB) are struggling to deliver. P&G’s stock jumped marginally after the earnings release, negating the fear which was factored in its price post Unilever’s bleak Q3 results. P&G benefited from the turnaround in China and the continued market growth in its 10 core product segments. Brand portfolio transformation, product innovations and premiumization played a key role in these results.  We believe that P&G will continue to benefit from these three strategies in the future to further revive its growth.

See our complete analysis for Procter & Gamble

Q3’16 Highlights:

• Organic sales and volume growth continued in all the five segments in lieu of successful innovation and marketing campaigns.
• Both the U.S. and China, which are the top two markets for P&G, reported 3% and 2% organic sales growth respectively. China has seen a massive turnaround since the growth from the region was -8% in the first half of FY 2016.
• High commodity prices and increasing wages across the developing markets turned out to be a headwind which was likely offset by the organic volume increase across all the segments.

Strategy 1 : Portfolio Transformation and Productivity Improvement

• Under the portfolio transformation program, P&G sold 100 under performing brands to concentrate on 65 of its core brands.
• The benefits of the sale of 41 beauty brands to Coty will start reaping from Q2’17 as the deal has been closed in early October.
• Already, the simplified portfolio and focused attention on core brands has led to a turnaround in organic growth of the key segments such as hair care, baby care, fabric care & grooming.
• Cost savings in the last 5 years from improved productivity and efficiency stood at $7 billion with a target of $10 billion for the next 5 years.

Strategy 2: Product Innovation

• Product improvements are essential to gain the market share and improve customer stickiness.
• Mach 3 razor, which has 55 million customers was upgraded in the quarter for the first time in a decade.
• The new ‘Crest 3D White toothpaste’ was launched which supported the fastest growing Healthcare segment.
• Further product launches have been scheduled for the third and fourth quarter of this fiscal year.

 Strategy 3: Premiumization

• Premium products yield higher revenues and better margins compared to the cheaper products.
• SK-II, which is the premium skin care brand led a strong 3% organic sales growth in the beauty segment.
• The launch of new Crest 3D White toothpaste also indicates towards premiumization of the product category.
• P&G’s management declared that it plans to focus only on the top and middle price tiers which have been showing higher growth and profits ^[1].

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1. Seeking Alpha Q1’17 Earnings Transcript [↩]