Investors were optimistic heading into Procter & Gamble's (PG 1.08%) latest earnings report. The company had recently closed the books on its best fiscal year since starting its transformation strategy in 2013, and confidence was high that P&G can extend most of that positive momentum into fiscal 2020.
On Tuesday morning, the company surpassed those high expectations by all measures, leading management to take the rare step of boosting its guidance just one quarter into the new fiscal year.
More on that rising forecast in a moment, but first let's take a closer look at the latest results.
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Sales momentum
Organic sales shot higher by an impressive 7%. Rather than slowing as management had predicted back in early August, P&G's growth rate held steady when compared to last quarter, which itself was the fastest expansion rate in over a decade.
Nearly all of P&G's product segments showed market-thumping sales gains. The beauty division, home to SK-II and China Olay brands, enjoyed a 10% boost, while the fabric care unit that houses the Tide detergent franchise rose 9%. Only grooming, which includes the struggling Gillette razor brand, stumbled: Sales inched higher by 1% as volumes declined slightly.
Overall, though, the results constituted continued positive momentum against peers like Kimberly-Clark. The owner of the Huggies diaper brand reported 4% quarterly sales growth on the same day as P&G's earnings release.
Strong finances
P&G's finances shined in the period. Gross profit margin increased thanks to a combination of cost cuts, higher prices, and falling commodity costs. Selling expenses fell as a percentage of sales, too. These trends allowed operating profit margin to rise by nearly 3 full percentage points, leading to a 24% increase in core earnings per share after adjusting for currency exchange moves.
Cash flow, a key pillar of management's financial plan, was strong as P&G converted 91% of its operating cash into free cash flow. That success supported the return of roughly $5 billion directly to shareholders, with $1.9 billion coming from dividends and $3 billion coming from stock repurchase spending during the quarter. "We delivered strong top-line growth, profit margin expansion, and cash productivity," CEO David Taylor said in a press release.
A brighter outlook
P&G boosted its 2020 guidance across several metrics. Taylor and his team now see organic sales rising between 3% and 5% compared to the prior range of 3% to 4%. Core earnings per share are now on pace to increase between 5% and 10% rather than between 4% and 9%.
Sure, those are modest increases. But the fact that management was confident enough to boost its top- and bottom-line predictions after just the first fiscal quarter suggests P&G is seeing plenty of support for its growth initiatives today. And, given that core sales growth has beaten expectations in each of the last three quarters, momentum is clearly on the consumer products titan's side right now as rivals scramble to try to arrest its market share gains in areas like beauty products, healthcare, and fabric care.
