After a slow third quarter, The Procter & Gamble Company (PG) reported decent fiscal fourth-quarter 2013 results beating the Zacks Consensus Estimate for both earnings and sales. While volume performance was strong, margins were significantly weak in the quarter. The consumer giant also issued its fiscal 2014 guidance.
P&G’s fourth-quarter fiscal 2013 adjusted earnings of 79 cents per share surpassed the Zacks Consensus Estimate of 77 cents by 2.6%. Earnings were at the higher end of management’s guidance range of 69 cents to 77 cents and declined 4% from the prior-year level. Encouragingly, however, earnings declined less than management’s expectation of a shortfall in the range of 6%-16%. Solid volume gains, lower-than-expected taxes and reduced share count (due to significant buybacks) made up for the sluggish margins in the quarter.
Adjusted earnings excluded restructuring charges, legal charges in Europe and a write-down related to the divesture of the Braun household appliances business.
P&G’s net sales increased 2% to $20.7 billion in the quarter. The sales increase was at the higher end of management’s expectations of growth in the range of 1%-2% and also slivered past the Zacks Consensus Estimate of $20.59 billion. Sales growth improved due to robust innovation efforts and higher marketing investments which boosted volumes in the quarter.
P&G has been working on a turnaround plan to implement some meaningful changes to re-accelerate its top and bottom line. The turnaround plan aims at increasing focus on the 40 most profitable businesses, its 20 biggest innovations and 10 most important developing markets. In addition, the company has implemented costs savings and productivity improvement initiatives in order to improve margins.
Revenues and Margins
Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 4%, at the higher end of management’s guidance range of 3% - 4% due to strong volume growth.
Volumes grew 5% in the quarter, much better than the 2% reported in the third quarter. P&G was not much successful in raising prices as pricing was flat in the quarter, lower than third quarter’s gain of 1%. Foreign exchange hurt revenues by 2%, exactly in line with management’s expectation. Geographic/product mix hurt sales by 1%.
The Beauty segment recovered from the weakness seen in the third quarter as strong innovation drove volume growth. The Health Care segment, which includes brands like Oral-B and Vicks, performed well once again and delivered organic sales growth of 7% and organic volume growth of 4%. The business gained from increased innovation and portfolio expansion which boosted market share. Product innovation also helped the Fabric Care/Home Care and Baby Care/Family Care segments to post decent organic growth. However, the Grooming segment, which includes razors and shaving cream, did not perform too well due to market contraction, increased competitive activity and currency headwinds.
Core gross margin declined 90 basis points (bps) to 47.7%. Core selling, general and administrative expenses (SG&A) increased 40 bps (as a percentage of sales) to 32.6%. Core operating margin declined 130 bps to 15.1% as productivity /overhead savings and sales leverage were offset by higher marketing and pension costs. Geographic/product mix and currency headwinds and increased innovation and capacity start-up costs also hurt margins. Both the gross and operating margins declined sequentially from the third-quarter levels.
In fiscal 2013, the company witnessed a 1% increase in revenues to $84.2 billion, slightly beating the Zacks Consensus Estimate of $84.06 billion. The top-line increase was at the bottom end of management’s expected range of 1% to 2% growth. Organic sales grew 3%, also at the bottom end of the guidance range of 3% to 4%.
Adjusted earnings (excluding non-core items) were $4.05 per share, which beat the Zacks Consensus Estimate of $4.04 and were ahead of the guidance range of $3.96 – $4.04. Earnings increased 5% from the prior year.
Fiscal 2014 Outlook Introduced
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 fiscal 2013’s earnings growth rate, the higher end equals management’s long term expectations of high-single to low double-digits earnings growth. The earnings guidance includes a currency headwind of 6%, much higher than its impact in 2013. However, non-core-restructuring costs are expected to be lower than last year.
Management expects organic sales to increase between 3% and 4%, ahead of market growth. Net revenue is expected to rise between 1% and 2%. Currency is expected to hurt revenues by 2%.
Growth in 2014 is expected to be achieved on the back of accelerated productivity gains, innovation in core brands and further growth in core developed/developing markets.
Other Stocks to Consider
P&G carries a Zacks Rank #3 (Hold). Some consumer staples companies currently doing well and are worth considering include Church & Dwight Co. Inc. (CHD), B&G Foods Inc. (BGS) and Dole Food Company Inc. (DOLE). While BGS and DOLE carry a Zacks Rank #1 (Strong Buy), CHD carries a Zacks Rank #2 (Buy).
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