What's Got Procter & Gamble So Confident?

Procter & Gamble (NYSE: PG  ) is acting a little cocky these days.

In a shareholders' meeting last month, embattled CEO Bob McDonald bragged to investors about the company's "decisive" plan to deliver strong shareholder returns. "We're confident we're doing what's right and necessary to achieve these objectives," McDonald said. Management also boasted that the company had some disruptive product innovation in the works too. 

And we're not just talking about new detergent scents. P&G is working on innovation of the type that "obsoletes current products and creates new categories and new brands."

A few weeks after the meeting, P&G put some hard numbers behind that big talk when it released its first-quarter earnings report. In that filing, the company called for an ambitious 2% to 4% sales growth over the coming quarters. Just how did P&G feel about its ability to deliver big returns to shareholders over that time? You guessed it: "confident." While its good to see Procter & Gamble's management so self-assured, I'm not convinced that the company can deliver so much, so quickly.

Tough environment
For one thing, the consumer staples world is under intense pressure right now. Fellow industry competitor Unilever (NYSE: UL  ) saw declines in developed markets last quarter, and forecast a challenging environment ahead. The company sees rising commodity costs and more cutthroat competition impacting results for the coming year. Against that backdrop, Unilever took a different tack than P&G, saying that it expects to deliver only "modest" improvements this year.

And while it's not in Procter & Gamble's industry, McDonald's (NYSE: MCD  ) sent out another worrying message on the global consumer environment last week, reporting its first monthly drop in same-store sales since 2003. The fast-food giant credited the "pervasive challenges of today's global marketplace" for the weakness in sales. Even J.M. Smucker  (NYSE: SJM  ) saw its profit margin plummet from 37.1% to 34.6% in the most recent quarter.

In a rough setting like that, it's no surprise that consumer businesses are logging soft growth. And P&G has had its own share of negative surprises. The company had to issue an amended sales forecast in June, lowering the forecast for organic sales growth to 2%-3% from the 4%-5% it had projected. It was the company's second profit warning in just three months.

P&G's latest quarterly results didn't do much to change that story. The company reported a slight overall sales gain, but also saw volumes slip in three of its segments: beauty, grooming, and health care. P&G's other two divisions, fabric care and home care, registered 0% and 2% volume growth, respectively. Net sales fell by 4% to $20.7 billion.

Considering that the company was working in the marketing afterglow of its Olympic games sponsorship -- which was projected to lift sales by as much as $500 million -- that's not exactly scorching growth. All told, P&G managed just 2% organic growth in the quarter. While that was on the high end of guidance, it's well below last year's 4% increase.

But the company's ambitious forecast comes down to the next few quarters, particularly Q3 and Q4. That's when P&G plans to ramp up marketing around what it calls a "strong second half innovation program" focused on developed markets. In a conference call with analysts, when asked how the company expects to hit its sales forecast given the soft first quarter, CFO Jon Moeller mentioned innovative products that have yet to be announced but will help the business accelerate in the second half of the year. It's good to know that the product pipeline is strong, but all the results so far point to continued weakness in the industry, and for P&G.

So what?
If Procter & Gamble does end up walking back its sales guidance, I wouldn't expect a hugely negative reaction for the stock. Shares are already reflecting a lot of investor pessimism, underperforming the market by 10 points on the year.

Still, at a P/E ratio of about 19, P&G could stand to get cheaper, especially as compared to a company like Clorox (NYSE: CLX  ) , which just reported strong margin expansion in its own first quarter, and is valued at less than 18 times trailing earnings. Clorox underpromised and overdelivered in the quarter, and that's a direction I'd like to see P&G take.


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