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P&G (PG) Beats on Q3 Earnings & Sales, Tightens EPS View

The Procter & Gamble Company’s PG earnings and revenues exceeded expectations in the third quarter of fiscal 2016. The consumer goods giant however narrowed its fiscal 2016 earnings guidance.

P&G’s third quarter adjusted earnings of 86 cents per share beat the Zacks Consensus Estimate of 81 cents by 6.2%, while it declined 3% from the prior-year period. Excluding currency headwinds of 3 cents, earnings per share remained unchanged on the back of pricing gains and productivity savings. 



Quarterly Discussion

P&G’s net sales slightly beat the Zacks Consensus Estimate of $15.73 billion by 0.2%, after missing the same for the last eight quarters. The top line however declined 7% to $15.76 billion in the third quarter as steep currency headwinds hurt sales significantly, thereby lowering the value of international sales.

With around 60% of the company’s business generated outside North America, currency headwinds affected sales by 5% as a strong dollar lowered the value of virtually every currency in the world.

Volumes also declined 2% due to Venezuela deconsolidation and minor brand divestitures, which resulted in a sales decline in the third quarter, despite pricing gains.

Brand divestures and management’s portfolio-reshaping efforts are also hurting P&G’s sales. Since 2014, the company has been carrying out portfolio strengthening and simplification plans to streamline its business and focus more on the biggest brands. Per the plan, that is nearing completion, the company has eliminated almost 60% of the brands (roughly 100 brands) that were witnessing decline in sales and profits to focus on 65 core brands across 10 categories.

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues grew 1%, owing to pricing gains of 1%. Organic volumes and mix remained unchanged.

Four out of the five business segments recorded negative organic sales growth. While Fabric Care and Home Care rose 2% in the third quarter, Beauty and Baby, Feminine and Family Care segments each declined 1%. The Grooming segment was down 5%, while Health Care dropped 2%.

Rising Margins

Core gross margin improved 270 basis points (bps) to 50.9% as productivity cost savings, lower commodity costs and pricing benefits were offset by currency headwinds, lower volume and unfavorable geographic/product mix.

Core selling, general and administrative expenses (SG&A) decreased 20 bps (as a percentage of sales) to 28.7% owing to benefits from overhead spending reductions due to productivity efforts. Core operating margin increased 300 bps to 22.2%, owing to higher gross margin and productivity savings.

P&G is carrying out an aggressive cost cutting plan to reduce spending across all areas, namely supply chain, research & development, marketing and overheads.

Fiscal 2016 Guidance

The Cincinnati-based company has maintained the previously issued sales guidance. The company continues to expect net revenue to decline in high single-digits in fiscal 2016. Currency is expected to hurt revenues by 6%-7%. Moreover, minor brand divestures combined with deconsolidation of results of Venezuelan subsidiaries is expected to hurt sales by 2%–3%. Organic sales guidance was maintained within the range of flat to up in low single-digits.

The company has however tightened its core earnings per share (EPS) guidance, including negative Fx impact. The company now expects core EPS to decline 3%-6% as against the previously guided decline range of 3%–8%. Currency impact is expected to negatively hurt earnings by 9%, as against the previous guidance of 10%. Constant currency EPS growth is now expected in mid-single digits as against the prior expectation of a mid-to-high single-digit range.

Also, P&G expects fourth quarter core earnings to be significantly lower than the prior year due to a combination of increased advertising investments, a higher tax rate, headwinds from foreign exchange and lower non-operating income.

P&G carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the consumer staples sector include Church & Dwight Co. Inc. CHD, The Clorox Company CLX and Unilever Plc UL. All of them hold a Zacks Rank #2 (Buy).

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UNILEVER PLC (UL): Free Stock Analysis Report
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