Source: P&G Annual Report
Consumer products giant Procter & Gamble (PG +1.11%), the brand behind Bounty towels, Tide detergent, and Gillette razors, among others, had little to do with the Dow Jones industrial average's recent ascent to 17,000, at least in the final stretch. P&G shares since November -- when the Dow initially surpassed 16,000 -- have pulled back nearly 6%, as noted by CNBC. Shares of rival Unilever (UL 0.73%) meanwhile, are hovering near a 52-week high.
Nonetheless, P&G hasn't entirely hung shareholders out to dry, as it returned $12.5 billion to investors via share buybacks and dividends in 2013.
But P&G has been struggling to grow, as evidenced by flat all-in net sales in its most recent quarter and declining sales across key market segments amid fierce competition and challenged same-store sales at retailers. P&G hasn't been sitting idly by, and is in the midst of a restructuring program aimed at slashing costs, a turnaround effort launched in fiscal 2012 that will continue through fiscal 2016. Is it enough to make the company an attractive investment at these levels, or has the tide for P&G turned for the worse?
P&G's game plan
P&G's turnaround strategy has been to divest underperforming assets, which it has done most recently with the sale of its bleach and pet foods businesses. The company is aiming to reduce its costs, which so far it has managed to do, as evidenced by a reduction in its selling, general, and administrative expenses by 170 basis points in its fiscal third quarter. This helped to drive its operating profit margin higher by 30 basis points, but that was overshadowed by a lower gross margin, which fell from 49.8% to 48.4% year over year. Competitor Unilever grew its gross margin in 2013 to 41.3% from 40.2% in the prior year.
On the innovation side, P&G seems to have a few tricks up its sleeve, with plans to enter an new product category in coming months, one that management has declined to identify as of yet. It is also counting on its higher-end consumers to drive its profit growth, evidenced by a recent and creative price increase on laundry detergent (by reducing the number of loads per package) in addition to a focus on a luxury product roll out in its beauty segment under the Dolce & Gabbana name.
P&G's mainstream Olay brand, sold at discount retailers, has a 10% market share, and now the company is hoping it will have similar success with higher-margin items. Dubbed Essential, the Dolce & Gabbana luxury skin-care line will be sold at high-end retailers, including Saks Fifth Avenue.
If P&G is successful with its strategy, it will drive its top line higher and lead to stronger profit growth over the coming years. While sales have been rising, they only advanced 1% in 2013 compared to a 3% increase in 2012. Its operating income, however, grew 9% last year versus a 14% decline in 2012, proving that P&G's cost-cutting initiatives have been somewhat fruitful.
Unilever grew its underlying sales by 4.3% in 2013 compared with a 6.9% jump in 2012. A key difference between the competitors is that P&G generates nearly 40% of its sales from North America, while Unilever gets 57% of its business from emerging markets. There has been hope for an economic recovery in emerging markets for several years, one that has been slow to materialize.
For now, P&G is targeting fiscal 2014 organic sales growth of 3% to 4%, or all-in sales growth, which adds in the impact of foreign exchange, of 1%.
Foolish conclusion
P&G wants to be more efficient and has its sights set on delivering greater shareholder value. So far its efforts appear to be producing the expected results, although P&G still has a ways to go.
The thing about investing in P&G, though, is that you know what you're going to get. The company is projecting approximately 3% growth for the foreseeable future and has been steady in returning value to shareholders via stock buybacks and dividends. With $1.4 billion in cash flow in the most recent quarter, that doesn't look set to change any time soon.
The stock has been under pressure, but at a forward P/E of 19 is priced competitively with Unilever at about 20. If you believe in the company's turnaround efforts, which thus far appear to be on track, then now could be a good time to invest in P&G with the understanding that patience is key because it could take a little while before you are rewarded with better returns.
