Procter & Gamble (PG +2.74%) announced fiscal second-quarter results last week. Rather than show accelerating sales growth as investors had hoped, the consumer staples titan posted weaker revenue gains.
CEO David Taylor and his executive team held a conference call with Wall Street analysts during which they tried to put that sluggish growth in perspective. Here are a few highlights from that discussion.
A tough quarter
Sales growth has been challenging in a very difficult market environment.
-- CFO Jon Moeller
Organic sales inched higher by 1% to mark a slowdown from the prior quarter's 2% uptick. P&G described tough operating environments in international markets including Saudi Arabia, Egypt, Nigeria, and Brazil. The U.S. business, meanwhile, was hurt by "rapid shifts to e-commerce and aggressive inventory management" by retailers, executives said.
Image source: Getty Images.
Struggles in two core businesses
We're not where we need to be on two large businesses, baby care and grooming.
-- Moeller
Management called out the baby care and grooming segments as poor performers during the quarter. Its diaper business was pinched by low-priced private label brands in the U.S. while the Gillette franchise continued to shrink due to aggressive price cuts.
P&G believes these trends will improve with time, but these two critical business lines still posted disappointing 3% organic sales losses in the period.
Finances are solid
Core earnings per share were $1, up 4%. Our operating margin declined 100 basis points. Our gross margin declined 110 basis points due mainly to higher commodity and freight costs.
-- Moeller
P&G's profitability declined this quarter, mainly because of pricing challenges. Its productivity initiatives, meanwhile, continued to deliver big financial gains that offset most of the negative impact of lower prices and increased input costs.
PG Operating Margin (TTM) data by YCharts.
Taylor and his team expect pricing to strengthen over the next six months but they also cautioned that they'll take aggressive actions when they see the need to support their brands. They followed this strategy with Gillette razors and Luvs diapers this year, and executives are generally happy with the impact it has had on sales volumes.
Shifting strategies
While our plan is clearly showing evidence of progress in many areas, we have not yet tied it all together to deliver the industry-leading balanced growth in value creation we expect of ourselves.
--Taylor
Executives were blunt when assessing their recent performance. And that's at least partly an acknowledgement that investors are losing patience with a turnaround effort that's stretching into its third year.
Shareholders have been expecting to see accelerating sales gains, especially following a portfolio reboot that cleaved over 100 brands from P&G's portfolio. Instead, persistent market-share losses convinced investors to vote for a shakeup in the board of directors late last year, against management's recommendation.
Taylor and his team sought to reassure investors that they're pursuing new, more aggressive growth strategies. These include a transformed supply chain and a fresh approach to allocating P&G's massive annual advertising spending.
Slowing rather than accelerating
We're maintaining our [fiscal 2018] guidance range for organic sales growth of 2% or 3%. We're at 1.4%, year to date, leaving us at the low end of this range.
-- Moeller
There's little evidence yet that P&G's recent initiatives are producing a sustained business uptick. In fact, rather than accelerating as initially forecast, fiscal 2018 growth looks like it will mark a small step backwards from the prior year's 2% organic sales uptick.
That means that three years into P&G's turnaround effort, investors have yet to see evidence that faster sales growth is returning. Given that disappointment, it's understandable that shares dropped following the earnings announcement and remain far behind the broader market over the past five years.
