At first, I questioned and doubted. Next, I became cautiously optimistic. And now I'm ready to say it: Owing to a strategy shift, beefed-up marketing, and more confident consumers, the beleaguered Procter & Gamble (NYSE:PG) appears to be turning the corner.
P&G's fiscal 2010 second-quarter sales came in at $21 billion, a sweet 6% above the year-ago period. Organic volume jumped 5%, notching a massive year-over-year improvement of seven points. Net earnings per share were $1.49, although this is somewhat misleading. Stripping out divestitures and other special items, EPS from continuing operations rallied to $1.10, a guidance-beating 22% gain.
But don't get too lathered up. The second quarter of 2009 was particularly ugly, which makes for easy comparisons this time around. Take volume growth, for instance. About 2% of the gain comes from retailers simply bringing inventories back up to more normal levels versus last year, which is distinct from consumers stacking their carts high with more Tide and Charmin. That said, P&G's business is gaining momentum.
Five of the company's six segments posted organic sales growth (grooming was the lone holdout) and both developed and developing regions showed sequential gains in volume and organic sales. Going forward, I believe that this type of quarter-on-quarter growth will be key to stoking investor confidence.
As for specific products, management described their Pampers Dry Max diapers as "the biggest innovation from the Pampers brand in 25 years." Markedly thinner, the product wins environmental bragging rights -- heck, it even scored a photo-op at the Clinton Global Initiative. The high-tech diaper is scheduled for a full North American rollout in March. While the Pampers name doesn't exactly evoke a mean left hook, Kimberly-Clark's (NYSE:KMB) Huggies brand had better look out.
In addition, P&G recently picked up the Ambi Pur air-care business from Sara Lee (NYSE:SLE), which, on the basis of geographic exposure and product technology, management called a "strategic homerun." Also, the company continues to focus on enhancing consumer value, having lowered prices on Cheer and introduced a value version of Tide in India. Interestingly -- and this is a point that surprised me -- pricing adjustments made during the past year come to only about 1% of companywide sales.
As a final tidbit to lift shareholder spirits, CVS Caremark (NYSE:CVS) is scheduled to jettison Energizer's (NYSE:ENR) namesake alkaline batteries from its shelves early this year, instead favoring P&G's Duracell brand. I expect that product reduction will remain a strong trend among retailers, which means that if other chains follow suit, the bunny's loss could mean an appreciable gain for P&G.
Looking forward, management lifted its 2010 organic sales growth guidance from 2%-4% to 3%-5%, while holding fast to its previously announced EPS estimate of $4.02 to $4.12 (core EPS is expected at $3.53-$3.63).
P&G doesn't yet have a recovery in the bag; it still needs to prove that it can grow market share, which was essentially flat in the quarter, although it trended upward. Moreover, its product portfolio will probably never be as trade-down resistant as that of Colgate-Palmolive (NYSE:CL), nor do I expect it to grow as fast as a Church & Dwight (NYSE:CHD).
But if you've been waiting for signs of a turn before initiating or adding to a position, I'd say this is it.
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