P&G sales rise by most in 13 years as turnround takes hold
Procter & Gamble is growing sales at the fastest pace in 13 years, according to its latest quarterly figures, in the clearest sign yet that the consumer goods group is staging a recovery.
While an $8bn writedown at its Gillette business highlighted persistent challenges facing legacy brands, all five of P&G’s main divisions were able to raise prices for their products in the company’s fiscal fourth quarter.
Jon Moeller, chief financial officer, said the US company behind products including Pampers nappies, Ariel detergents and Pantene hair care was coping with a “tsunami” of costs and trade tariffs, in part by passing them on to customers.
Results published on Tuesday showed the price rises were not hurting overall volumes. Organic sales — which strip out the impact of foreign exchange, acquisitions and divestitures — rose 7 per cent from a year ago, the strongest quarterly growth since 2006.
Wall Street welcomed the figures, which mark a turnround for a company whose longstanding battle to stop consumers defecting to newer brands hit profitability and made the company a target two years ago for activist investor Nelson Peltz.
Shares rallied more than 4 per cent on Tuesday morning in New York, even though a writedown of goodwill and intangible assets pushed P&G to a net loss of $5.24bn for the three months to the end of June.
P&G said the writedown at its Gillette shaving business was due primarily to currency devaluation, although it also recognised that grooming had been hit by “market contraction of blades and razors, primarily in developed markets”.
Along with its big rivals, P&G has long been under pressure from changing consumer tastes and intensifying competition that have hurt pricing power. Grooming products have been among the worst hit. Men are shaving less and Gillette has lost ground to the likes of Dollar Shave Club and Harry’s.
However, speaking to reporters on Tuesday, Mr Moeller insisted grooming was a “very attractive” sector for P&G and Gillette was “a truly global business, with very strong market positions”.
Mr Moeller said P&G’s strategy to refocus its portfolio on successful brands, combined with efficiency improvements, was bearing fruit. “All of this is coming together, which is driving the results that you’re seeing.”
Markets appear to share the optimism. Even before the rally on Tuesday, P&G’s shares had jumped 63 per cent from a three-year low in May 2018, outperforming a 24 per cent advance in the US consumer staples index and making them the 11th-best performing member of the S&P 500 over the period.
P&G earnings were the latest in a series of corporate updates that have indicated consumers are prepared to pay more for household staples, providing relief for a sector that has long struggled to boost prices. Kimberly-Clark, maker of Huggies nappies and Kleenex tissues, last week raised its full-year outlook for sales and profits.
P&G’s price rises included a 4 per cent average increase across its fabric and home care products in the quarter, helping the company combat higher costs.
Mr Moeller said the strong dollar, rising commodity and trucking costs and trade tariffs had created a $1.4bn “after-tax headwind” for P&G during the year. There was a near-$100m hit from tariffs and $400m from commodities, he said, including sharp rises in pulp, resin and kerosene.
Despite the pressures, gross margins strengthened from 45 per cent a year ago to 47.7 per cent in the June-end quarter.
The strong set of results came a year after Mr Peltz secured a seat on the P&G board, having criticised the company for what he called “chronic underperformance”. P&G has implemented several of his demands, which included simplifying its corporate structure and accelerating innovation, although the company said some of those changes were already being planned before his arrival.
Gillette recently launched SkinGuard, a type of razor for men designed to reduce irritation, helping quarterly organic sales from P&G’s grooming division rise 4 per cent from a year ago even as volumes fell 1 per cent.
Other new products the Ohio-based group is pushing include Zevo, an insect killer that is marketed as safe for children and pets, and Oral B Genius, a Bluetooth-enabled smart electric toothbrush.
P&G’s nascent recovery showed consumer goods companies need not be a victim of circumstance, said Caroline Levy, analyst at Macquarie. “It’s easy to assume these companies are going into a death spiral, but that assumes they don’t have the ability to change,” she said. “They do, and they are changing. Some faster than others.”
Challenges remain for the company. While volumes in the quarter rose in all of the company’s five divisions apart from grooming, the increases were a modest 1 per cent in beauty and in the baby, feminine and family care products, where a falling birth rate has hurt demand for Pampers.
“The real question is the sustainability” of the recovery, said Ali Dibadj, analyst at Bernstein.
For its next fiscal year, the company forecast organic sales would rise between 3 and 4 per cent. That marks a slowdown from the 5 per cent recorded in the fiscal year just ended but compares favourably with the previous year, when the company delivered organic growth of only 1 per cent.
P&G “continues to operate in a very difficult competitive and macro landscape”, Mr Moeller added. “Our work is not over.”
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