U.S. Markets closed

Mixed 4Q for P&G, Keeps 2013 View

Zacks Equity Research

The Procter & Gamble Company’s (PG) fourth quarter of 2012 adjusted earnings (excluding restructuring charges) of 82 cents per share were ahead of the Zacks Consensus Estimate of 77 cents as well as management guidance of 75 cents–79 cents.

Nevertheless, earnings were flat with prior-year levels, as benefits from pricing and cost savings from restructuring activities were offset by top-line shortfall and rising commodity costs.

P&G’s net sales inched down 1% to $20.2 billion in the fourth quarter of 2012 and were in line with management expectations. P&G’s net sales marginally missed the Zacks Consensus Estimate of $20.3 billion.

Foreign currency fluctuations against a strong dollar are pulling down revenues for most of the companies that have significant business outside the U.S. P&G, the maker of Tide detergent and Olay shampoo, is no exception with this regard, and this headwind primarily dragged the revenues down.

Back in late June, the consumer goods giant had lowered its sales and earnings outlook for the final quarter of fiscal 2012 marking the second successive cut in the company’s guidance in the last three months. The guidance cut resulted from a slowing global economy, sluggish market share growth in the developed countries and China, and foreign exchange headwinds. The overall results announced were almost in line with the lowered guidance.

Revenue and Margins

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 3% as pricing benefits offset headwinds from product/geographic mix and foreign exchange. The organic revenue growth was at the higher end of management guidance.

Broad-based price increases, mainly to offset the commodity cost headwinds, added 4% to revenue growth. Geographic/product mix pulled down sales growth by 1% due to higher growth in developing nations and product categories which have lower selling prices. Foreign exchange hurt revenues by 4%, as expected by management. Volumes were flat in the quarter.

However, core gross margin increased 10 basis points to 48.6%, as pricing and cost savings offset headwinds from commodity costs and  geographic/product mix. Core selling, general and administrative expenses (SG&A) declined 80 basis points (as a percentage of sales) to 32.2% in the quarter, due to lower overhead costs. Core operating profit was up 4% in the quarter due to productivity improvements and cost savings.

Segment Discussion

Beauty: Beauty products declined 4% over the prior-year quarter (up 1% organically) to $4.8 billion as price increases were offset by headwinds from volume and mix. Price increases added 4% to revenue growth whereas mix reduced it by 3%. Foreign exchange had a negative impact of 4% on revenues.

Volumes were down 1%. Volume gains in Prestige Products were offset by weakness in Beauty and Hair Care. The segment’s net earnings were flat at $382 million due to revenue shortfall, rising commodity costs and unfavorable mix.

Grooming: Grooming products declined 6% (flat organically) to $2.0 billion, mainly due to currency headwinds of 6%. Price increases added 1% to revenue growth whereas product mix reduced it by 1%. Volumes were flat with mid-single digit volume growth in Appliances offsetting flat Shave Care volumes. Net earnings were flat at $406 million as revenue shortfall was offset by operating margin growth.

Health Care: Health care products declined 1% (up 3% organically) to $2.9 billion. Price increases added 4% to revenue growth while volumes grew 1%. Mix and currency pulled down revenues by 1% and 5%, respectively. Volume gains in the Personal Health Care and Feminine Care segment were offset by declines in the Oral Care segment. The segment’s net earnings were down 2% to $336 million due to gross margin headwinds.

Fabric Care and Home Care: The segment declined 1% (up 3% organically) to $6.6 billion as pricing gains were offset by volume and mix headwinds. Price increases added 5% to revenue growth, whereas mix and volumes reduced it by 1% each. Foreign exchange hurt sales by 4%.

Volume decline in Home Care was offset by declines in the Pet Care and Fabric Care segments. The segment’s net earnings improved 10% to $635 million due to higher gross margins and lower SG&A which offset the revenue shortfall.

Baby Care and Family Care: The segment grew 1% (up 5% organically) to $4.1 billion driven by price and volume growth. Price increases added 4% to revenue growth, whereas currency reduced it by 4%. Volumes were up 1% with increases in Baby Care, offsetting the decline in the Family Care segments.

The segment’s net earnings increased 13% to $540 million, driven by sales growth and improvement in operating margins. Operating margins expanded due to higher gross margins, which were driven by price increases and cost savings.

Overall, almost all the business segments witnessed sequential declines in revenue and net earnings. All the segments also witnessed volume gains in the fast growing developing nations as against their developed counterparts, which are currently suffering from low consumer disposable incomes and saturated markets.

In June 2012, P&G completed the sale of its snack unit that included the iconic Pringles brand to cereal maker The Kellogg Company (K). The transaction generated a gain of 48 cents per share, including which earnings would have been $1.24.

Annual Results

In fiscal 2012, the company witnessed a 3% increase in revenue to $83.7 billion, slightly missing the Zacks Consensus Estimate of $83.9 billion. Adjusted earnings (excluding mark-to-market effects and restructuring charges) were $3.85 per share, which beat the Zacks Consensus Estimate of $3.80. Earnings, however, declined 1% from the prior year.

2013 Outlook

For fiscal 2013, the company expects revenues to remain flat or decline 2% from 2012 levels, mainly due to currency headwinds of 4%. P&G maintained its previously provided organic sales growth guidance of 2%-4%.

Pricing is expected to boost the top-line by 2% while geographic/product mix is expected to pull it down by 1%. The company also maintained its previously provided core earnings guidance range of $3.80-$4.00. The Zacks Consensus Estimate stands at $3.89 per share. P&G expects to repurchase stock worth $4 billion in the year.

Further, management continues to expect its productivity and cost savings plan, announced in February 2012, to generate $10 billion in cost reductions by the end of fiscal 2016. The plan aims to reduce spending across all areas, including a workforce reduction of 5,700 by the end of fiscal 2013.

First Quarter 2013 Outlook

In the first quarter of fiscal 2013, the company expects revenues to decline in the range of 4%-6. Organic sales are expected to remain flat or grow 2%.

Pricing is expected to boost the top-line by 3% while foreign exchange is expected to pull it down by 6%. Core earnings are expected to remain in the range of 91 cents to 97 cents, representing a year over year decline of 4%-10% mainly due to currency headwinds.

Our Recommendation

We currently have an Underperform recommendation on Procter & Gamble. The stock carries a Zacks #4 Rank in the near term (Sell rating).

P&G is struggling due to sluggish growth in the developed nations, principally in North America and Western Europe, which account for almost 60% of the company’s sales and a higher percentage of profits. Moreover, rising commodity costs are constantly hurting the company’s margins. Other short-term headwinds like business disruptions in Venezuela, import restrictions in Argentina and a negative impact of foreign exchange are also posing near-term challenges.

Read the Full Research Report on PG

Read the Full Research Report on K

Zacks Investment Research

More From Zacks.com