For years, we’ve been hearing about how global sales growth was the key to success for major U.S.-based companies. These days, though, international operations are actually eating into overall revenue growth for top consumer-products companies.
Just ask Procter & Gamble (NYSE: PG ) , which delivered lackluster second-quarter earnings this morning. Net revenue actually decreased by 3%, and organic sales (no, not organic products, just revenue excluding mergers and acquisitions and currency exchange) grew by 2%. The revenue decline was primarily driven by negative foreign exchange impacts and a 3% decline in volume. The only category to deliver volume growth for the quarter was baby care, as Pampers continues to generate gains in emerging markets.
Price increases contributed 4% to top-line quarterly results. Snacks and pet care delivered the biggest pricing increase, with jumps of 10%, while pricing in all categories except for beauty increased by at least 3%. In light of declining revenue, and in spite of fluctuating commodity costs, the costs of goods sold (COGS) and selling, general, and administrative expenses (SG&A) each declined by 2% for the quarter.
P&G is not alone in its pain: Kimberly-Clark (NYSE: KMB ) delivered similar quarterly results driven by the same combination of sales-volume declines and unfavorable currency exchange. I really wish more multinational companies had shown the strategic approach to currency risk that Heinz (NYSE: HNZ ) has. We had to know that the free ride global companies were getting from a weak dollar would end at some point.
For some perspective, I looked back at P&G earnings from five years ago (you know, when the world economy was actually expanding). Back then, P&G was generating 20% quarterly increases in net sales, with currency delivering 4% of the top-line revenue growth. Those days are well and truly over, at least for the short term.
But is P&G a good investment for the long term? What if global markets become saturated with branded products? What if consumers are starting to "trade down" to private-label products to save a few bucks, making premium products like P&G's an unaffordable luxury? What if P&G is relying too much on M&A for growth, as it has with recent sales of Folgers and ThermaCare product lines?
Even if all of this were true, I still believe that P&G would deliver value for investors. Despite today's unsavory news, P&G still generated a 61% increase in net earnings (though primarily driven by its Folgers divestiture). Yes, net earnings from continuing operations declined by 7%, but really, results might have been worse if costs weren't controlled as closely as they were. I believe that P&G will continue to manage the dynamic economic situation to protect shareholder value. Hopefully, it'll also start integrating currency fluctuations into an overall global growth strategy. In the long run, when the world economy reverses its current contraction, P&G will be positioned to continue to grow its business.
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