Investors haven't been happy with Procter & Gamble's (NYSE:PG) performance lately. You can see hints of that disappointment in the fact that the stock trailed the market by a wide margin in 2017. But it was made even clearer in shareholders' recent vote to give activist investor Nelson Peltz a seat on P&G's board of directors.
CEO David Taylor and his team mounted an aggressive defense against Peltz and his fund's proxy challenge last year. Yet once the votes were counted, management said they heard the message that "P&G needs to move faster to deliver improved results."
On Tuesday, the company will issue its first quarterly update since the proxy vote results. Let's take a look at what the numbers might show as executives consider making major strategic changes.
Sales growth and market share
P&G's last quarterly report was marked by a slowdown in organic sales growth as its expansion pace dipped to 1% from 2% in the prior quarter. The global market for branded products weakened during the late summer months, and that negative trend was amplified by extreme weather that pinched results across Texas, Florida, and Puerto Rico.
Yet there were also signs of a potential growth rebound building. P&G managed decent overall sales volume and defended market share across most of its top brands. And the Gillette shaving franchise even posted its first demand uptick in years following an aggressive price cut.
This week's results will show whether that momentum carried through into the fiscal second quarter to help P&G stay on track for the 2% to 3% sales uptick it has projected for the full year. That pace wouldn't match the 3% to 5% gains that rivals like Colgate Palmolive and Unilever (NYSE:UL) are logging right now, but it would be solidly ahead of Kimberly-Clark's (NYSE:KMB) flat results.
The good news for investors is that P&G's business generates impressive profits and cash flow during challenging selling environments like this. That was true even before the company started its cost-cutting initiative, which has cleaved billions of dollars out of its expense infrastructure.
In fact, operating income hit a five-year high in fiscal 2017 despite P&G suffering from its third consecutive annual sales decline. As a result, net profit margin is up to 15.7% of sales from 14% in fiscal 2017. Its operating profitability is near the top of the industry at just over 21%.
Investors can expect cost cuts to continue lifting operating profit margin and help earnings rise at a faster pace than sales -- up about 6% in fiscal 2018. That financial win should fund cash returns that, through dividends and stock buybacks, will send as much as $15 billion to shareholders this fiscal year.
A new direction?
P&G's new board member won't take his seat until early March, but shareholders are likely to get hints next week about how management is shifting their strategy in response to Peltz's election.
Executives made it clear that they won't be entertaining risky ideas like breaking the company apart, loading P&G up with new debt, or slashing research and development spending.
At the same time, investors have sent a clear message that they're looking for changes in P&G's operating approach. That call for a dramatic strategic shift will only get louder if the company's disappointing streak of annual market share losses stretches on into another fiscal year.