When it comes to beauty, the thrill may be gone for Procter & Gamble Co.
This story first appeared in the April 24, 2015 issue of WWD. Subscribe Today.
Several Wall Street analysts are waiting to see if P&G will largely exit the category when it completes its ongoing portfolio simplification strategy over the next year.
The company on Thursday reported that sales in its beauty, hair and personal care segment slid 11 percent, with organic sales down 3 percent, dragged down by prestige fragrances and mass skin-care categories.
Beauty’s lackluster results prompted several financial observers to wonder if P&G has already taken its focus off the beauty category as it prepares to sell off brands.
Analysts prodded P&G for details on possible beauty divestitures during the firm’s earnings call on Thursday, but the company provided little detail.
“We are going to try to have more visibility on the portfolio by the summer,” Jon Moeller, P&G’s chief financial officer, told analysts. “There is no business that we have not objectively analyzed.”
Moeller said P&G plans to strike deals for the largest pieces of the sell-off by summer and enter 2017 with its new portfolio in place. The brands that stay may see their stockkeeping units reduced by 15 to 20 percent over the next two years, Moeller said.
The company expects to exit approximately 100 brands, and to date has divested or has planned to divest more than 40 brands across businesses such as bleach, pet care and batteries. Its also sold some beauty and personal-care names, including DDF and Noxzema skin care, and Camay and Zest bar soap.
Wall Street continues to speculate about what beauty brands will go, but there’s a growing consensus forming around the theory that P&G will opt to sell most of beauty — including cosmetics brands such as CoverGirl and Max Factor, SK-II, professional hair-care brands, such as Wella, and fragrances.
Should P&G sell all these pieces of the business, only Olay and its retail hair-care brands, such as Pantene and Head & Shoulders would be left, morphing P&G into a household products and personal-care company. Others think Olay should go, too, as it’s become overly articulated with product iterations, clunky and difficult to fix.
In the third quarter, P&G felt the pinch on the top line, as sales fell nearly 8 percent in part due to strong currency exchange headwinds.
During the quarter ended March 31, net income attributable to P&G fell 17.6 percent to $2.15 billion, or 75 cents a diluted share, compared with $2.61 billion, or 90 cents a share, in the year-ago period.
Net sales for the quarter decreased 7.6 percent to $18.14 billion, compared with $19.64 billion in the year-ago period. Organic sales gained one percent.
For the nine-month period, net income attributable to the company was $6.52 billion, or $2.26 a diluted share, compared with $9.06 billion, or $3.12 a share, in the year-ago period. Net sales fell 4 percent to $58.49 billion, compared with $60.91 billion in the year-ago period.
Consumer Edge Research analyst Javier Escalante said in a research note that David Taylor, who recently assumed the role of global president, global beauty, grooming and health care, will likely be charged with streamlining beauty business.
He wrote, “Beauty organic sales weakened to negative 3 percent. In a decade, this is the second time that beauty sales are this weak, suggesting distraction ahead of the divestitures. We believe that Mr. Taylor has been appointed to divest most brands. P&G didn’t ‘get’ the beauty sector before, and its fragmentation of channels and categories makes it incompatible with P&G’s centralized organization.”
Stifel analyst Mark Astrachan estimates P&G may sell off half of its beauty portfolio. “Sales and volume weakness was attributable in part to continued underperformance in beauty — [which accounts for] 25 percent of sales — where sales and volumes meaningfully decelerated on a sequential basis, down 3 percent and 4 percent, respectively, despite easier volume comparisons,” Astrachan wrote in a research note on Thursday. “We believe this indicates P&G continues to lose share in a number of key beauty categories. We also think it explains and makes easier the decision to sell or IPO large pieces of the beauty business — we estimate at least 50 percent of segment assets are likely to be sold, as has been suggested in numerous press reports.”
During the call, Moeller said the company’s “portfolio simplification” initiative, which was put into motion last August, “strategically resets P&G’s where-to-play choices.” “We’re focused on winning with consumers and customers who matter most in channels, countries that matter most with core brands and businesses that create the strongest consumer preferences and the best balance of growth and value creation.” He continued, “We’ll eliminate about 60 percent of the brands and the complexity they create while retaining 80 percent of sales and 95 percent before-tax profit. That’s a good trade. The new company will consist of about 65 leading brands where the size, prize and probability of winning are the highest in 10 categories that are structurally attractive and play to P&G’s core strength.”
Moeller said analysts have consistently asked the firm if it can grow its megasized leading brands. He noted that P&G’s billion dollar brands — which include Pampers and Tide among others — are growing faster than its half-billion dollar brands. “Our largest brands are our fastest-growing brands,” he said.
Although he did acknowledge, “A few of our leading brands are not growing like we know they can.”