A Closer Look At Procter & Gamble After Its Fiscal Q2 Earnings

by Trefis Team
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Procter & Gamble
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Procter & Gamble (NYSE: PG) announced solid fiscal second quarter results on January 23, as both its earnings per share and revenues came in ahead of market expectations. The company also issued strong guidance for the full year fiscal 2019. In Q2, the company’s net sales came in flat at $17.4 billion, driven by growth in the Beauty and Fabric Care segments, offset by declines in the Grooming and Baby and Feminine Care businesses. Moreover, 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 fact, P&G’s solid organic sales growth in Q2 was boosted by a more than 30% gain in organic e-commerce sales. In terms of bottom line, P&G’s core EPS (adjusted) also grew 5% y-o-y to $1.25, primarily driven by increased net sales.

Procter & Gamble’s stock price has fluctuated between $71 and $92 in 2018, mostly due to falling prices and rising cost inflation. We have an $84 price estimate for P&G’s stock, which is slightly below the current market price. We have created an interactive dashboard on Can Procter & Gamble Keep Beating Expectations In Its Fiscal Third 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.

Q3 Expectations

In Q3, we expect Procter & Gamble to report flat revenues on the back of declines across segments – Grooming and Baby, Feminine, and Family Care. This is because we continue to expect the rising competition from local players to negatively impact the revenue in the Baby, Feminine, and Family Care segments in Q3. 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 Q3, we expect the company’s SG&A costs to be around $4.6 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 slightly in Q3, on the back of rising delivery costs. Based on these adjustments, we expect P&G’s adjusted operating income to decline almost 5% y-o-y to about $3.3 billion for Q3 2019. Overall, these adjustments resulted in a 6% y-o-y increase in our adjusted net income forecast for the company, translating into adjusted EPS of $1.08.

Fiscal 2019 Outlook

P&G has updated its full-year fiscal organic sales growth outlook to 2% to 4%,compared to a previous 2% to 3% range, driven by the strong momentum of the fiscal first half. It also expects total revenues to be in the range of down 1% to up 1%, compared to previous guidance of down 2% to in-line with fiscal 2018 results in the same period. In terms of the bottom line, the company reaffirms its expectation of core earnings per share growth to be in the 3% to 8% range.

For the full year, commodity costs are expected to be a $400 million headwind and trucking costs will likely be up 25% or more versus last year’s levels. In addition, pricing could remain positive in the back half, but this could increase volume uncertainty and volatility. Further, macro uncertainty stemming from issues like Brexit and a crisis of consumer confidence in France could also impact both the top and bottom line for the full year.

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