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Economic Woes Hit P&G’s Profit Outlook

The consumer products giant on Wednesday cut its profit forecast for the final quarter of the fiscal year.

Procter & Gamble Co. is feeling the squeeze of slower economic growth.

This story first appeared in the June 21, 2012 issue of WWD.  Subscribe Today.

The consumer products giant on Wednesday cut its profit forecast for the final quarter of the fiscal year, citing a slowdown in developed markets in particular, as well as in China. The revised guidance hit P&G’s stock, sending it down 2.93 percent to close at $60.39 on the New York Stock Exchange.

P&G now expects organic revenue gains in the fourth quarter ended June 30 to be between 2 percent and 3 percent versus the year-ago period, said Robert McDonald, president, chairman and chief executive officer of P&G, at the Deutsche Bank Global Consumer Conference held in Paris.

“This change reflects the soft underlying market and market-share trends in developed markets,” he said. “We’ve seen sequential deterioration in the rates of market growth in both the U.S. and Europe, and there has been a slowdown in the rate of market growth in China.”

Sales for the period are anticipated to be down 1 percent to 2 percent on a reported basis, while core earnings per share should be between 75 cents and 79 cents, and all-in EPS between $1.17 and $1.26.

P&G is the latest major company to express concern over the months ahead given the lackluster U.S. economy and the economic crisis in the euro zone. Slowdowns in economic growth in key developing markets like China, India and Brazil also are stirring worries among analysts and business leaders.

Still, McDonald is under increasing pressure because of low organic sales growth and weakness in developed markets, which account for 60 percent of sales. Even he admitted P&G is going through a rough patch.

McDonald said since beginning in his current position almost three years ago, “our results haven’t been as strong as we’d like, but we have continued to grow. We’ve grown organic sales each of these three years at an average of about 4 percent. EPS growth has averaged about 5 percent. We’ve delivered strong cash flow. We’ve increased our dividend each of the last three years, at an average rate of 8 percent.”

Most of that growth has come from developing markets. McDonald, who took the helm from A.G. Lafley in 2009, said, “We’ve substantially increased our developing market footprint. Developing market sales represented just 20 percent of our total sales in fiscal year 2000. By the end of this fiscal year, they will account for about 37 percent of sales and 45 percent of volume.”

He noted that, over the last four quarters, sales in these markets have grown at an average rate of 12 percent.

“The absolute scale of our developing market business has nearly quadrupled, growing from about $8 billion in sales in the year 2000 to over $31 billion of sales this fiscal year. Our growth in developed markets has been weaker, owing to both slower market growth and the market share declines, primarily in North America. This is an area we must and we will improve,” said McDonald.

Having said that, McDonald added the company — which plays in 37 product categories — will tighten its focus in an effort to boost its fortunes.

“We are targeting our 40 largest and most profitable businesses, the 20 largest and most promising innovations, and the 10 most important developing markets, where the growth potential is the highest,” explained McDonald. “We do business in 1,000 category-country combinations. The top 40 represents about 50 percent of our sales and about 70 percent of our profit. Twenty of these are in the household care business, and 20 are in the beauty and grooming business.”

In the past, P&G has looked to price increases to accelerate the top line, but has recently rethought those moves in light of more cautious consumer spending. McDonald acknowledged, “There are some cases where we’ve taken pricing and competitors have not. This means our pricing is currently too high. We haven’t done a consistently good job of communicating the difference in performance of our brands and our products. And we haven’t been as overt as we need to be about the value of our offerings and what they provide.”

But P&G’s premium prices may make it more vulnerable to economic downturns and shaky consumer confidence. Morgan Stanley analyst Dara Mohsenian wrote in a research note Wednesday, “P&G has greater macro sensitivity than its large cap staples peers given its premium priced portfolio, which drives trade down risk with higher pricing.”

As for the $10 billion cost-savings plan P&G unveiled earlier this year, McDonald said, “We’ve made good progress in the first few months of this program. We’re on track to overdeliver our plan to reduce overhead roles by 3 percent this year, and we have a plan firmly in place to deliver 10 percent cumulative reduction by the end of next fiscal year. And we won’t stop there.”

McDonald noted, however, “We are facing short-term headwinds, including foreign exchange, pension expense and the policy changes in Venezuela and Argentina. We will work on savings that can help offset these impacts, but we will not cut spending — on R&D or advertising.”