Overview of P&G’s Q3 Results And Our Q4 Expectations

by Trefis Team
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Procter & Gamble
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Procter & Gamble‘s(NYSE: PG) revenue and earnings per share came in ahead of market expectations in its fiscal third quarter earnings. Below we discuss key takeaways from Q3 earnings report using the Trefis Interactive Dashboard. You can modify our forecasts for the company’s revenues and key drivers to see how changes would impact its earnings and valuation.

Growth In Revenues, Earnings in Q3

In Q3, the company’s net sales grew 4% year-over-year (y-o-y) to $16.2 billion, driven by growth in the Beauty, Fabric & Health Care segments, partially offset by flattish growth in the Baby and Feminine Care businesses. However, the company’s organic sales grew positive in all segments except Grooming and Baby and Feminine Care business. Overall, the company’s organic sales were up 1% on 2% volume growth, with a 2% decrease in pricing and 1% growth in mix across all segments. P&G’s pricing was negative largely due to price cuts with U.S. shaving products. In addition, the company’s gross margin fell 90 basis points due to higher commodity costs and an unfavorable geographic mix of sales. In terms of bottom lime, P&G’s core EPS (adjusted) also grew 4% y-o-y to $1.00, primarily driven by increased net sales partially offset by a reduction in operating margin due to reinvestments and gains on the sale of real estate in the base period.

Grooming Segment Continues To See Declines

Grooming segment organic sales fell 3% y-o-y again in Q3, due to reduced pricing in Shave Care, driven by lower pricing in the U.S. and low volume growth globally, partially offset by double-digit growth in Appliances. The Grooming segment contributes only around 10% of the company’s total revenues but accounts for 15% of its value, per Trefis estimates. The segment has struggled to generate revenue growth of late, due to rising competition from smaller subscription-based startups such as Dollar Shave Club and changing beard preferences in men. Consequently, P&G’s share in the wet shaving market has declined from over 70% in 2010 to 54% in 2016.

Q4 Expectations

We expect the company’s SG&A costs to be around $4.9 billion in Q4, down 9% year-over-year (y-o-y). This is based on our assumption of growth in productivity savings from the combination of reduced overhead, agency fees, and ad production costs. We also expect the company’s adjusted gross profit margin to decline slightly in Q4, on the premise of rising delivery costs. Based on these adjustments, we expect P&G’s adjusted operating income to decline almost 9% y-o-y to about $3.2 billion for Q4 2018. Overall, these adjustments resulted in a more than 10% dip in our adjusted net income forecast for the company, translating into adjusted EPS of $0.93.

Full Year Guidance

P&G expects its organic sales growth to fall in the low end of the 2% to 3% guidance range in fiscal 2018. It also expects total revenues to reach $67 billion in the same period. In terms of the bottom line, the company continues to expect its core earnings per share growth to be in the 6% to 8% range, as compared to the previous 5% to 8% range.

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