The Procter & Gamble Company’s PG third-quarter fiscal 2015 earnings matched expectations while revenues fell short. Moreover, the consumer goods giant lowered its fiscal sales expectations to reflect the “unprecedented currency devaluations.”
P&G’s third-quarter adjusted earnings of 92 cents per share came in line with the Zacks Consensus Estimate. Earnings declined almost 8% year over year including currency headwinds of 18 cents per share. Excluding currency headwinds, earnings increased 10% on the back of pricing and mix gains and productivity savings.
Revenue Discussion
P&G’s net sales declined 8% to $18.1 billion. The top line missed the Zacks Consensus Estimate of $18.5 billion by 2.2%. As expected, currency headwinds hurt sales by 8%, while divestitures had a negative impact of 1% on sales. We would like to remind investors that this is the fifth time that P&G has missed sales in a row due to currency headwinds and sluggish sales in the Beauty, Hair and Personal Care businesses.
Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 1% driven by pricing and mix gains, which made up for softer volumes. Pricing increased sales by 2%, while product mix increased it by 1%, offsetting a volume decline of 2%.
While organic sales at the Grooming, Healthcare and Baby, Feminine and Family Care segments picked up from the year-ago quarter, Beauty, Hair and Personal Care businesses slowed down. Fabric Care and Home Care segments remained flat in the reported quarter.
Margins
Core gross margin improved 20 basis points (bps) to 49.5% as productivity cost savings and pricing benefits 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 50 bps (as a percentage of sales) to 30.8% as productivity savings were offset by currency headwinds. Core operating margin declined 30 bps to 18.7% due to higher SG&A ratio.
Fiscal 2015 Sales Guidance Lowered
The Cincinnati-based company was compelled to lower its sales outlook in view of a higher-than-expected negative impact from currency. However, management reiterated its core earnings per share guidance.
Net revenue is expected to decline in the range of 5%-6%, against the prior expectation of a decline of 3%–4%. Currency is expected to hurt revenues by 6%-7%, much higher than 5% expected previously. Organic sales are now expected to be in low single digits for fiscal 2015, as against the prior growth expectation of low-to-mid single-digit range.
The company continues to expect core earnings per share to be flat or decline in a low single digit range in fiscal 2015. Management continues to predict currency impacts to hurt core earnings per share by 12%. Excluding currency headwinds, management expects double-digit core earnings per share growth.
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.
P&G carries a Zacks Rank #4 (Sell).
A better-ranked company from the broader consumer staples sector is Monster Beverage Corporation MNST, sporting a Zacks Rank #1 (Strong Buy).
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