Please ensure Javascript is enabled for purposes of website accessibility

With Sales Sluggish, Price Hikes and Cost Cuts Drive Procter & Gamble Co. Earnings

By Joe Tenebruso - Apr 27, 2016 at 12:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Intense competition is taking a toll on the consumer goods titan, but price increases and productivity improvements are boosting profitability.

Image source: Procter & Gamble.

Procter & Gamble (PG -2.75%) reported fiscal 2016 third-quarter results on April 26. The owner of brands such as Tide laundry detergent and Pampers diapers is struggling to offset declining sales volumes with cost reductions and price hikes.

The raw numbers 

 

Q3 2016

Q3 2015

Growth (YOY)

Sales

$15.755 billion

$16.930 billion

(7%)

Net income from continuing operations

$2.337 billion

$2.401 billion

(3%)

EPS from continuing operations

$0.81

$0.82

(1%)

Data source: Procter & Gamble Q3 2016 earnings press release. 

What happened with Procter & Gamble this quarter?
Organic sales -- which exclude the impact of foreign exchange, acquisitions, and divestitures -- rose 1%, driven by price increases as organic shipment volume was unchanged versus the third quarter of 2015. However, foreign currency exchange rate movements reduced sales by 5 percentage points, with brand divestitures and the deconsolidation of P&G's Venezuelan operations reducing sales by an additional 3 percentage points. That led to an overall year-over-year decline in net sales of 7% to $15.8 billion.

P&G is facing intense competition in many of its markets such as its grooming business, where its popular Gillette brand is being pressured by lower-priced competitors here in the U.S.  P&G is also seeing growing opposition from local rivals in large international markets such as China. To combat these trends, Procter & Gamble is ramping up its advertising spending to strengthen consumer awareness of the benefits of its brands.

In the meantime, price hikes and cost-cutting initiatives are helping to improve P&G's profitability. "Core" (a non-GAAP measure that adjusts for restructuring and other non-recurring charges) gross and operating margins increased by 340 and 270 basis points, respectively, on a currency-neutral basis in the third quarter. That helped currency-neutral core EPS remain flat year over year at $0.89.

Cash flow and capital returns
Importantly, Procter & Gamble's cash flow generation remains strong, with operating cash flow exceeding $3.2 billion and free cash flow surpassing $2.4 billion in the third quarter. That, along with the nearly $14 billion in cash investments on its balance sheet, allowed P&G to reward its investors with $1 billion in stock buybacks and $1.9 billion in dividend payments in Q3.

Looking forward
P&G reiterated its forecast for full-year organic sales of "in-line to up low single digits" compared to fiscal 2015. Yet P&G continues to expect its fiscal 2016 all-in sales to be "down high-single digits" versus fiscal 2015 results, primarily due to an impact of negative 6 to 7 percentage points from foreign exchange.

The company also narrowed its projected range for core EPS to down 3% to 6% from its previous guidance of down 3% to 8% versus 2015's core EPS of $3.76. However, management lowered its guidance for constant currency core EPS growth to "mid-single digits" compared to its prior outlook of "mid-to-high single digits." 

"We continue to make progress on the transformations we are undertaking to return P&G to balanced top and bottom-line growth and maintain strong cash generation," said CEO David Taylor in a press release. "We delivered another strong quarter of productivity improvement and cost savings, and we increased investments in innovation, advertising and selling to enhance our long-term prospects for faster, sustainable top-line growth and value creation."

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$141.04 (-2.75%) $-4.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
328%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.