Procter & Gamble Co Earnings: Sales Growth Takes a Step Backwards

Image source: Procter & Gamble.

Procter & Gamble (PG 0.60%) posted earnings results for its fiscal third quarter on April 26 that showed little progress at returning to a steady sales growth pace. The consumer goods titan trailed rivals Unilever (UL -0.17%) and Kimberly-Clark (KMB 5.51%) in the key metric of organic growth, yet still managed to significantly improve profitability over the last few months.

Here's how the headline figures stacked up against the prior-year period.

Data source: Procter & Gamble's financial filings.

The fiscal third-quarter numbers were lifted by efficiency gains, price hikes and spending cuts, but provided little evidence to support the thesis that P&G's two-year trend of sluggish growth is about to end.

Here are the key highlights of the quarter:

• Organic growth was 1%, marking a slowdown from the prior quarter's 2% uptick. Unilever, by comparison, posted 5% organic gains last week and Kimberly-Clark grew by 2%.
• Volume declined in four out of P&G's five business divisions, meaning that price hikes had to once again deliver almost all of the organic sales gains. In contrast, improving volumes led the way for both Kimberly-Clark and Unilever in the quarter.
• P&G's overall sales dropped 7% thanks mainly to foreign currency changes and lost business from brand divestments.
• Cost cuts and pricing increases produced a 3-percentage-point jump in gross margin, which helped power a 10% boost in operating income despite the shrinking revenue base.
• P&G generated $2.4 billion of free cash flow that helped fund $1 billion of share repurchases and $1.9 billion of dividend payments.
• The company affirmed its full-year sales and earnings guidance.

In the absence of strong growth momentum, CEO David Taylor chose to highlight the strides P&G made in its financial initiatives that included selling its battery business and improving profitability. "We continue to make progress on the transformations we are undertaking to return P&G to balanced top- and bottom-line growth and maintain strong cash generation," he said in a press release.

Image source: P&G.

"We delivered another strong quarter of productivity improvement and cost savings, and we increased investments in innovation, advertising, and selling to enhance our long-term prospects for faster, sustainable top-line growth and value creation," Taylor explained.

With growth slipping lower after the prior quarter's sequential improvement, and with volume figures still declining, it's clear that the consistently positive sales trend shareholders are hoping for isn't yet in the cards.

Instead, P&G appears on pace to deliver another year of weak organic growth that's closer to 2015's 1% than to the robust 3% to 5% gains it used to enjoy.

On the plus side, the 10% jump in operating income points to strong earnings gains that should start accruing to investors as soon as foreign currency challenges settle back down. Shareholders should also be encouraged by P&G's stellar cash generation, which remains strong enough to fund massive capital returns over the next few years, but likely not through significant dividend hikes.