A Closer Look At Procter & Gamble After Its Fiscal Q1 Earnings

Procter & Gamble (NYSE: PG) announced solid fiscal first quarter results on October 19, as both its earnings per share and revenues came in ahead of market expectations. In Q1, the company’s net sales came in flat at $16.7 billion, driven by growth in the Beauty and Fabric Care segments, offset by declines in the Grooming, Health Care, and Baby and Feminine Care businesses. Furthermore, foreign currency exchange headwinds also impacted the company’s results by 3%. However, P&G’s organic sales were up 4% year-over-year (y-o-y) on 3% volume growth, with flat pricing and 1% growth in mix across segments, excluding the impacts of foreign exchange, acquisitions and divestitures. In terms of bottom line, P&G’s core EPS (adjusted) also grew 3% y-o-y to $1.12, primarily driven by increased net sales, partially offset by cost challenges.

Procter & Gamble’s stock price has declined over the course of 2018 due to falling prices and rising cost inflation. Our $84 price estimate for Procter & Gamble’s stock is slightly below the current market price. We have created an interactive dashboard on Can Procter & Gamble Keep Beating Expectations In Its Fiscal Second Quarter? which outlines our forecasts for the company’s Q2 results. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

Q2 Expectations

In Q2, we expect Procter & Gamble to report a slight decline in revenues on the back of declines across major segments – Grooming, Health Care and Baby, Feminine, and Family Care. This is because we expect the rising competition from local players to negatively impact the revenue in the Baby, Feminine, and Family Care segments in Q2. We also expect the Grooming segment to continue its declining revenue trend, due to secular pressure from the likes of Dollar Shave Club. However, the rising popularity of its direct-to-customer model Gillette-On-Demand could offset some of this pressure. In addition, commodity costs, foreign exchange challenges, and transportation costs could persist and likely worsen in Q2, which could impact the company’s growth rates.

Crude oil, a key feedstock for many raw materials, is up more than 50% than this time last year. In addition, trucking costs are also expected to be up 25% or more compared to last year’s levels. Almost 56% of P&G’s revenue comes from outside of North America, of which a major chunk (34%) comes from emerging markets. Largely, P&G’s revenues in these markets are influenced by local cultural buying habits and local currency exchange rates, in addition to local competition and political issues. Of late, currency fluctuations have remained a major headwind for the company – with the Turkish lira devaluing 25%, the Argentine peso more than 40%, and the Indian rupee nearly 10%. Going forward, the company’s revenues could fall if the market volatility continues into Q2 as well. In order to combat these headwinds, the company is planning to increase some selective prices in Home Care, Oral Care, and Personal Care segments. In Q2, we expect the company’s SG&A costs to be around $4.8 billion, slightly up 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 nearly 4% y-o-y in Q2, on the back of rising delivery costs. Based on these adjustments, we expect P&G’s adjusted operating income to decline almost 10% y-o-y to about $3.6 billion for Q2 2019. Overall, these adjustments resulted in a slight dip in our adjusted net income forecast for the company, translating into an adjusted EPS of $1.20.

Fiscal 2019 Outlook

P&G reaffirms its organic sales growth to fall in the 2% to 3% guidance range in fiscal 2019. It also expects total revenues down 2% to in-line with fiscal 2018 results 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 3% to 8% range.

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