Procter and Gamble Co.’s A.G. Lafley, who steps down as chief executive officer in a week, finished his term in characteristic fashion: using cost cuts to offset the company’s sluggish sales.
P and G posted earnings of 98 cents a share for its fiscal first quarter, excluding some items, according to a statement on Friday. That topped the 95 cents that analysts had estimated, even while revenue tumbled more than anticipated.
Lafley, who came out of retirement to rejoin the company in May 2013, has focused his second stint as CEO on reducing expenses and selling unprofitable brands to focus on promoting its marquee names like Tide, Gillette and Pampers. Lafley’s strategy has improved profitability, yet the divestitures have only exacerbated P and G’s revenue declines.
“The profit expansion was impressive, and that provides the fuel to continue to fund those brand investments,” Erin Lash, an analyst at Morningstar Inc., said in an interview. Better marketing and promotions are "going to be key to help their products stand out in this intensively competitive environment."
Net income rose 31 per cent to $2.6 billion, or 91 cents a share. P and G’s gross margin, or the portion of sales left after subtracting the cost of goods sold, widened by 2.6 percentage points in the quarter.
P and G climbed 2.9 per cent, or $2.18, to $77.03 at the close in New York. The shares have declined 15 per cent this year, compared with a 4.2 per cent advance for the Standard and Poor’s 500 Consumer Staples Index.
Taylor’s Task
David Taylor, who will succeed Lafley on Nov. 1, will be under pressure to reignite revenue growth after sales volumes in all of P and G’s product categories fell during the quarter. Sales dropped 12 per cent to $16.5 billion, trailing analysts’ $17 billion average projection.
U.S. market share in the quarter fell slightly, Chief Financial Officer Jon Moeller said on a media call Friday. Also hurting sales was the fact that P and G exited some lower-tier products around the world to boost profitability, Moeller said. However, the company will work to cut prices to be more competitive with rivals in some categories, he said.
“We don’t like the top-line situation,” Moeller said during the company’s earnings call Friday. "We will fix the top line."
Strong Dollar
With almost two-thirds of its sales from overseas, P and G also is looking for ways to mitigate the effects of a strong dollar, which reduced sales by about 9 per cent in the quarter.
P and G is working to tailor its offerings and pricing in emerging markets. For example, it’s adding higher-priced diapers and training pants in China as consumers there become increasingly willing to pay up for higher-quality baby products. Much of P and G’s competition is coming from local players, so it needs to make sure it’s meeting consumer demands, said Lash, who recommends buying the shares
Taylor, who started as a production manager in North Carolina in 1980, will have to continue Lafley’s cost-cutting ways, improve P and G’s execution and add more of the natural products that customers are increasingly turning to, said Ali Dibadj, an analyst at Sanford C. Bernstein & Co.
“I’m betting that the company is seeing its low point, or is near its low point now,” said Dibadj, who recommends buying the shares. Still, “I would have been much less jaded if the last time I heard this from P and G, it happened."
News by Bloomberg, edited by ESM. To subscribe to ESM: The European Supermarket Magazine, click here.
