Procter & Gamble Earnings Review: Competition Remains A Threat, But Cost Savings Can Shield The Earnings

Procter & Gamble (NYSE:PG) released its Q3’17 earnings on April 26^th. The net sales of the company declined by 1% y-o-y and missed the analyst estimates, pulling the stock down nearly 2.5%, which is thrice its average daily movement for the last 20 trading sessions. Organic sales grew by 1% which is lower than the full year guidance of 2-3% growth. The top line was primarily affected by weak market conditions around the world along with currency headwinds. On the other hand, this quarter’s EPS of 96 cents went on to beat the estimates by 2 cents, led by the productivity improvements which contributed 260 bps to the margin.

Going forward, Procter & Gamble can face further pressure on the top line amidst weak macros and rising competition which was clearly visible from low organic growth in the March quarter. Therefore it will primarily have to rely on efficiency improvements, cost savings, and better marketing strategies to remain competitive in the market.

See our complete analysis for Procter & Gamble

Competition Can Further Hurt P&G’s Top Line

The fact that P&G’s top line failed to yield the desired results even after divestiture of over 100 non performing brands, points to the possibility of sluggish growth in the future as well. The worrying part was that some of the primary segments such as beauty and grooming failed to show any volume growth. In fact grooming was the biggest loser with a 6% fall in organic sales, signaling that Gillette has started to feel the heat from its competitors despite overall segment pricing being down 2%. The softened sales of baby and feminine products in China are again a surprise given that one-child policy has ended there. It indicates towards the growing threat from local players in the emerging markets who now have the capabilities to offer high quality products at lower prices.

To overcome this, P&G has stressed upon improving the quality, packaging, and marketing of its products while keeping the prices competitive. The aim being that its products on the shelves should stand out and attract the customers right away.

Huge Cost Savings Plan Can Come To The Rescue

P&G has guided for another $10 billion in cost savings by the end of 2021, which comes after robust savings of $7.2 billion in cost of sales over the last 5 years. The main areas of cost cutting will be raw materials, packaging, and manufacturing facilities. On the operations front, there will be noticeable cuts from the inefficient advertising and marketing channels, similar to what Colgate-Palmolive is doing.

P&G’s non-GAAP EPS has not seen any substantial growth over the past few years, but these efficiency improvement measures can lift the earnings up even when the top line is under stress; Kimberly Clark being an example of this. Along similar lines, we believe that just like the March quarter, P&G’s bottom line may remain intact in the near future as well.

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