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P&G Beats on Q1 Sales, FX Lowers Earnings

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Despite significant currency headwinds, The Procter & Gamble Company (PG) reported decent fiscal first-quarter 2014 results meeting the Zacks Consensus Estimate for earnings and beating the same for sales. While volume performance was decent, margins were once again weak in the quarter. The consumer giant also maintained its financial outlook for fiscal 2014.

P&G’s first-quarter fiscal 2014 adjusted earnings (excluding restructuring charges) of $1.05 per share were in line with the Zacks Consensus Estimate of $1.05. However, as expected, earnings declined 1% in the quarter largely due to currency headwinds of 9 cents per share. With around 60% of the company’s business generated outside North America, a strong dollar lowered the value of international sales.

Excluding currency headwinds, earnings increased 8% in the quarter as a strong top line, cost savings and lower-taxes made up for the sluggish margins in the quarter.

P&G’s net sales increased 2% to $21.2 billion in the quarter despite a 2% headwind from currency. Top line also slivered past the Zacks Consensus Estimate of $21.04 billion. Sales growth improved due to robust innovation efforts and higher marketing investments which boosted volumes in the quarter.

Revenues and Margins

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 4% due to strong volume growth.

Volumes grew 4% in the quarter, though slightly less than 5% in the fourth quarter of 2013. P&G was not much successful in raising prices as pricing was flat in the quarter, same as in the previous quarter. Foreign exchange hurt revenues by 2%. Geographic/product mix was flat.

The Fabric Care/Home Care and Baby/ Feminine/ Family Care segments were the strongest and delivered 6% organic sales growth each. While new distribution for Duracell batteries helped the former, product innovation in North America and market expansion for Baby Care in developing countries aided revenues of the latter. Both Beauty and Grooming segments increased 1% organically helped by innovation. However, Health Care segment’s organic sales were in line with the prior year due to a pet food recall.

Core gross margin declined 130 basis points (bps) to 49.3% due to currency headwinds, unfavorable geographic/product mix and higher commodity and manufacturing start-up costs. Core selling, general and administrative expenses (SG&A) improved 60 bps (as a percentage of sales) to 29.4% due to productivity/overhead savings and marketing spending efficiency. Core operating margin declined 70 bps to 19.9% as gains from a lower SG&A ratio were offset by lower gross margins.

Fiscal 2014 Outlook Retained

Core earnings per share are expected to grow in the range of 5%–7% in fiscal 2014. While the lower end of the guidance range is the same as the earnings growth rate in fiscal 2013, the higher end equals management’s long-term expectations of high single-digit earnings growth.

Earnings growth is expected to be second half weighted as several headwinds which are expected to hurt the first half earnings growth will dissipate in the second half. The second quarter is expected to face similar currency headwinds as in the first quarter. Earnings are expected to improve in the second half driven by top-line growth and accelerated productivity gains and cost savings.

Management expects organic sales to increase between 3% and 4%, better than the 2012 growth rate of 3%. Net revenue is expected to rise between 1% and 2%. Currency is expected to hurt revenues by 2%.

Other Stocks to Consider

P&G carries a Zacks Rank #3 (Hold). Some consumer staples companies currently doing well include Reckitt Benckiser Group plc (RBGLY), Kimberly-Clark Corp. (KMB) and The J.M. Smucker Co. (SJM). All the three companies carry a Zacks Rank #2 (Buy).

Read the Full Research Report on PG
Read the Full Research Report on RBGLY
Read the Full Research Report on KMB
Read the Full Research Report on SJM

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