Consumer goods titan Procter & Gamble (NYSE:PG) has a lot going for it as we head into 2016. Huge cost cuts have driven expenses lower, which could lead to an earnings spike. And after two years of shedding underperforming brands, Procter & Gamble finally has the portfolio that management believes will produce market beating sales and profit growth.
While that momentum could help the stock outperform this year, investors should keep an eye on factors that might cause shares to fall. Let's look at the three biggest challenges that threaten to produce another disappointing year for P&G shareholders.
An uphill climb for the broad industry
The selling environment for consumer staples was weak last year. Growth was sluggish in rich economies like the United States -- and downright awful in developing markets.
At the same time, a strong U.S. dollar sapped profits overseas, and conflict in many emerging markets caused massive sales disruptions. Those headwinds were a key reason why P&G logged just 1% organic sales growth in fiscal 2015. Even worse, volume slipped in four of its five major product segments.
The same issues promise to hamper results in the coming year. In fact, CEO David Taylor and his executive team expect organic growth to be flat in fiscal 2016. And they blame this weak forecast mainly on a "challenging and volatile macro environment."
Global rival Unilever (NYSE:UL) echoed these sentiments. In its latest outlook, management warned investors that it saw "soft global markets with no immediate sign of getting help from an improving global economy."
Rising threats from rivals
Competition is fierce in many of the markets where P&G competes, especially as the industry bounces along at close-to-zero growth. Unilever, for example, posted 6% higher organic sales in its personal care business last quarter. The company has seen success with innovation in its Degree and Dove brand deodorants, while its premium Zendium toothpaste has also taken off. In contrast, P&G's beauty segment shrunk by 2% last quarter, which management attributed, in part, to increased "competitive activity" in areas like hair care.
P&G's playbook involves extending its dominance in high-growth, high-margin brands like the Pampers diapers business. It has stolen market share from Huggies' owner Kimberly-Clark lately, and management plans to continue that trend by stepping up marketing investments and introducing pull-up style diapers into to new markets. Yet P&G will meet highly motivated rivals wherever it aims to post sales and profit growth.
That ever-present competitive threat is why innovation is so important to P&G's long-term success. As the company plainly states in its annual report, "Innovation has always been -- and continues to be -- P&G's lifeblood."
Product innovation comes in two flavors: enhancements and "game-changers." As for enhancements, P&G has a strong track record of constantly improving its products to meet changing consumer needs. One recent example is the new Simply Clean and Fresh line of value detergents that has helped it compete at the lower-end of that product segment.
But game-changing innovations -- like the Tide Pods that reinvented laundry or the Swiffer sweeper mops that shook the home-cleaning market -- have been hard to come by recently. P&G spends roughly $2 billion per year on research and development, and if it goes another year without squeezing a few major innovative breakthroughs from that investment, then sales growth could suffer -- pulling the stock price down with it.