The Procter & Gamble Company (PG) missed the Zacks Consensus Estimate for both earnings and sales in second-quarter fiscal 2015 — for the second quarter in a row. Moreover, the consumer goods giant lowered full-year expectations to reflect the “unprecedented currency devaluations”. Shares declined almost 3% in pre-market trading.
P&G’s second-quarter adjusted earnings of $1.06 per share lagged the Zacks Consensus Estimate of $1.14 per share by 7%.
Earnings declined almost 8% year over year including currency headwind of 16 cents per share. Excluding currency headwinds, earnings increased 6% on the back of pricing and mix gains, and productivity savings.
Revenue Discussion
P&G’s net sales declined 4% at $20.16 billion. The top line narrowly missed the Zacks Consensus Estimate of $20.70 billion.
As expected, currency headwinds hurt sales significantly, thereby lowering P&G’s international sales. With around 60% of the company’s business generated outside North America, a strong dollar lowered the value of virtually every currency in the world, mainly Russian Ruble.
Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 2% driven by pricing and mix gains which made up for the softer volumes.
Organic volumes were flat, same as the previous quarter. Pricing and product mix contributed 1% each to sales, while foreign exchange hurt revenues by 5%.
While the Grooming segment picked up slightly from the last quarter, Beauty and Healthcare businesses slowed down.
Margins Decline
Core gross margin declined 20 basis points (bps) to 50.4% as manufacturing savings were offset by currency headwinds, higher commodity costs, investments in innovation and capacity building and unfavorable geographic/product mix.
Core selling, general and administrative expenses (SG&A) increased 30 bps (as a percentage of sales) to 30.1% as productivity savings and marketing efficiencies were offset by currency headwinds and higher overhead spending. Core operating margin declined 60 bps to 20.2% due to lower gross margins and high SG&A ratio.
Fiscal 2015 Guidance Lowered
The Cincinnati-based company reiterated the currency neutral organic sales and core earnings per share guidance. However, higher-than-expected negative impact from currency compelled management to lower its net sales and earnings guidance.
Net revenue growth is expected to decline in the range of 3–4% lower than prior expectation of its being flat to up in a low single-digit range. Currency is expected to hurt revenues by 5%, much higher than 2% expected previously. Organic sales are still expected to grow in the low-to-mid single-digit range.
The company expects core earnings per share to be flat or decline in a low single digit range, versus prior expectation of growing in the mid single-digits. Management predicts currency impacts to hurt core earnings per share by 12%, almost double the prior range of 5–6%. We would like to remind investors that this is the second time this year that P&G has lowered its earnings expectations due to currency headwinds.
Excluding currency headwinds, management expects double-digit core earnings per share growth.
Stocks to Consider
P&G carries a Zacks Rank #4 (Sell). Slowing global market growth, strong currency headwinds, market level challenges in the Ukraine, Russia and the Middle East, Venezuela, Argentina and Hong Kong and rising commodity costs have made the operating environment challenging for P&G, hampering its growth.
P&G is in the process of divesting around 100 underperforming brands to concentrate better on fewer core strategic brands. In this regard, the company sold off its American and Asian pet care business to Mars, Inc. and European pet care business to Spectrum Brands Holdings, Inc. (SPB) last year.
Moreover, the company has signed a deal to divest its Duracell batteries business to Berkshire Hathaway, Inc. (BRK.B) in exchange for Berkshire’s equity stake in P&G. The divesture is expected to close in the second half of calendar 2015.
However, these structural changes and other initiatives to boost organic growth are yet to translate into top-line improvement.
A better ranked consumer goods company is The Clorox Company (CLX) which carries a Zacks Rank #2 (Buy).
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