Investors had gone years without seeing a sales growth upgrade from Procter & Gamble (PG -1.38%), but they've now enjoyed three consecutive hikes to that outlook. The consumer staples titan last week announced surprisingly strong demand as it raised its fiscal 2020 forecast on both the top and bottom lines.
In a conference call with analysts, CFO Jon Moeller explained the reasoning behind the boost while adding context to P&G's latest results, from the first quarter of 2020. Let's look at a few highlights from that presentation.
An unmistakable trend
"Over the last five quarters, two-year average growth has accelerated: 2.5%, 3%, 3%, 4%, now 5.5%," Moeller said.
Organic sales gains clocked in at a scorching 7%. That pace matched the increase from three months agothat had marked P&G's fastest quarterly growth in over a decade. It also remained far ahead of peers like Unilever (UL -0.52%) and Kimberly-Clark (KMB -1.02%).
The momentum is clearer when you look at revenue changes on a two-year basis that smooth out unusual swings based on timing. By that approach, executives said, sales gains have doubled to over 5% over the past 15 months. Consumption of P&G's products outpaced the wider industry, driving aggregate market-share growth, Moeller said.
Earning higher margins
Moeller also noted, "We're extending our margin of advantage and increasing the quality of execution."
P&G has been predicting that its decision in 2013 to remove 100 brands from its portfolio would lift profitability as the company focuses on just the products with the best potential for market-beating growth. That success is obvious from the fact that gross and operating margins both improved sharply, leading to a 22% increase in core earnings per share.
The key factor driving those gains, management said, is P&G's support for performance-driven brands like Tide detergent. "We made a deliberate choice to invest in the superiority of our products and packages, retail execution, marketing, and value," the CFO said.
"Additional investment will be needed to sustain this progress," according to Moeller.
P&G sees its improved momentum as more of a starting point to defend against rivals than a new normal. Management outlined several challenges along those lines in the call, including the need for more spending in areas like innovation, marketing, and retail packaging.
At the same time, competition from consumer products giants like Kimberly-Clark and retailers like Walmart (NYSE: WMT) should step up in the form of national promotions. Referencing the price cuts Moeller predicted a few months ago, he said he still expects a more aggressive response to P&G's latest market share gains, predicting that "I wouldn't say that we've seen everything that we're going to see" from competitors.
Raising the bar
"Moving now to guidance, we are raising our outlook on each key metric," he said.
P&G's upgraded growth outlook mostly reflects the faster industry growth that executives are seeing. The midpoint of their guidance still reflects market share growth, while the low end would translate into minor losses.
But while that demand picture is still cloudy, there's more clarity around P&G's improving finances. Earnings should rise by as much as 10% this year thanks to restructuring savings, lower costs, and higher prices. Cash flow is on track to surpass management's long-term annual growth target, too, which should support around $15 billion of direct cash returns split evenly between dividend payments and stock repurchases.