For the activist set to lose interest, Procter & Gamble needs to demonstrate sales improvements.
Sales numbers, linked to the stock price, are a key motivation behind the activists that have made their presence known to P&G in the past several years, according to financial sources. On Monday, Trian Fund Management LP initiated a proxy fight to get founding partner Nelson Peltz on the P&G board. But Peltz isn’t the first activist to target the group — back in 2012, Bill Ackman’s Pershing Square Capital Management also pushed for change and got it with the resignation of then-chief executive officer Bob McDonald. Both Ackman and Peltz held about 1 percent of P&G stock when they made their respective moves.
“The most important measure of success for investors these days is sales growth, and [P&G’s] has underperformed across key categories for a number of years while overall category growth has slowed,” said Stifel analyst Mark Astrachan. “The combination of the two makes it harder for the productivity savings to be leveraged because sales are lower.”
P&G — which has engaged in talks with Peltz but ultimately denied him a board seat — has moved up the date of its earnings release to July 27 from early August. The thinking is that good numbers could help the company’s fight against Peltz, sources noted.
“Over the last several quarters there has been a lot of cleanup work happening behind the scenes.…This quarter they’re going to lap all of that…all we need is a 1 percent improvement in organic growth trend,” said Deutsche Bank research analyst Faiza Alwy. “They’ll do everything to post a number that’s better than expectations.”
For its third fiscal quarter, P&G posted $2.6 billion in net earnings, down 8 percent year-over-year from almost $2.8 million. Net sales were $15.6 billion, down 1 percent from $15.7 billion in the prior-year period. Organic sales for the quarter increased 1 percent. Net beauty and grooming sales were both down — 2 and 6 percent, respectively, from the prior-year period. In the quarter before Ackman disclosed his stake in the business five years ago, P&G had posted 2 percent sales growth, to $20.2 billion (the company has divested several segments since then, including the bulk of its beauty business in a sale to Coty Inc.)
P&G has also implemented a $10 billion savings plan, which Peltz contended lost $7 billion to currency exchange. Peltz argues the other $3 billion didn’t drive sales or profits. Peltz’s plan — in which he emphasized he isn’t looking to oust ceo David Taylor or split up the company — could potentially change down the line, financial sources noted, but it’s unlikely the company would be split up because of tax implications.
“The reality is that P&G is not alone in its struggles.…This overall macro environment has not been very favorable and currencies have been probably the single biggest reason Procter has not been able to grow earnings,” said Nik Modi, an analyst with RBC Capital Markets, who noted that other big CPG companies have also faced struggles. “Unless Trian knows how to make the dollar weaker…I’m not sure what [Peltz] being on the board is going to accomplish that P&G’s not doing already.
“This [activism] makes sense four of five years ago,” Modi continued. “There was some opportunity for an activist to make more change. But since David Taylor has come on as ceo, Procter has addressed some of its issues.”
One of the things P&G has been criticized for is its speed — or lack thereof.
“The problem with P&G is just that everything takes very long,” said Faiza Alwy, research analyst at Deutsche Bank. “Their new-product cycles from conception to actual commercialization is a good two- to three-year process. They’ve missed a few big things.”
One of those things is diapers in China, she noted, where P&G missed the mark and had to go back to retrench. “Their organic growth would have been a point higher if they’d gotten China diapers right,” Alwy said.
Another rough patch is grooming, where Gillette has hemorrhaged market share, and recently lowered prices. “They announced a big price cut, but so far a benefit hasn’t shown up in the scanned channel numbers we track,” Alwy said.
Gillette is also facing increased competition — not just from Dollar Shave Club or Harry’s but from Edgewell, which launched a razor replacement it touts as “compatible with Gillette, Fusion and Mach3 razor handles” and is sold online. “They are putting this in markets where Gillette has a high market share and there are all these Gillette razors floating around,” Alwy noted.