Procter & Gamble(PG 0.31%) stock has held up well through the market carnage over the last few weeks, besting the broad market as shares traded flat. Its above average dividend yield and position as the world's leading consumer staples seller make it an attractive choice for defensive-minded investors.
And the stock's recent outperformance has reflected optimism that P&G would soon start posting strong revenue and profit growth after a long stretch of disappointing numbers. The company did see an earnings spike and a return to sales gains in quarterly results that it announced on Tuesday, Jan. 26, but they also point to a weak selling environment ahead.
Returning to sales growth
Organic growth was 1% for P&G's fiscal second quarter, reversing a negative 1% slip that it posted in the prior period. Yet while it's good news that the company is growing again, the organic growth uptick isn't as strong as it might first seem.
For one, it was powered solely by higher prices, rather than a healthy mix of pricing and volume gains. In fact, sales volumes were flat or negative in each of the company's five business segments. It's only because prices rose by 3% that P&G was able to overcome an average 2% volume decline to post a higher organic sales figure.
Second, P&G's growth trailed rivals in the industry. Kimberly-Clark (KMB 0.05%), whose Huggies diapers brand competes with P&G's Pampers franchise, posted 5% organic growth this week that was anchored by a healthy 4% boost in sales volumes. Peer Unilever (UL 0.82%) also just announced 5% organic growth that was split evenly between pricing and volume improvements.
P&G competes in different geographic markets, some of which have been wracked by strong economic headwinds, so its growth is likely to trail that of its peers. But the magnitude of the gap between P&G and rivals suggests that it is having trouble defending its market share in a few competitive product lines.
Profits and outlook
The company had plenty of good news to report on the profit side of the business, though. Billions of dollars of cost cuts helped push gross margin higher by three percentage points, up to 23% of sales. That allowed P&G to post a healthy 9% earnings boost, despite the near-flat sales performance. Its $1.04 per share profit figure beat consensuses estimates by $0.06 per share.
"We delivered solid core operating income and EPS growth in the face of significant macro-economic and geopolitical headwinds," CEO David Taylor said in a press release. Investors can expect this encouraging profit trend to continue, and even gain steam, as expenses keep falling and as foreign currency swings eventually stabilize.
Yet the economic headwinds that Taylor highlighted appear set to continue through the next two quarters that complete P&G's fiscal 2016. Executives didn't raise their full-year outlook that projects zero organic growth at the low end of the guidance range. By comparison, Kimberly-Clark and Unilever both recently projected a tough year ahead for their businesses but forecast higher growth than P&G.
That outlook implies stronger sales over the next six months, but it leaves open the possibility of a second straight year of disappointing declines. P&G posted a 1% organic sales uptick in fiscal 2015 after a 3% boost in the prior year.