P&G Beats by a Penny, Misses Sales - Analyst Blog

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Procter & Gamble Co. ( PG ) reported modest results for the third quarter 2012, with adjusted earnings (excluding restructuring charges) of 94 cents per share beating the Zacks Consensus Estimate by a penny.

Moreover, earnings were in line with the prior-year figure as benefits from top-line growth and cost savings from restructuring activities were offset by rising commodity costs. Adjusted earnings were within the company guidance of 91 cents to 97 cents per share.

Revenue and Margins

P&G's net sales increased 2% to $20.2 billion in the third quarter 2012. However, organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 3% driven primarily by pricing benefits, which offset headwinds from product and geographic mix.

Broad-based price increases added 5% to revenue growth, whereas geographic/product mix pulled down sales growth by 2%. Volumes were flat in the quarter. P&G's net sales marginally missed the Zacks Consensus Estimate of $20.3 billion.

The retail giant who until now owned 24 billion dollar brands like Tide and Gillette to name a few announced the addition of Vicks and SK-II to its core brands portfolio.

Gross margin for the quarter declined 150 basis points due to higher commodity costs and unfavorable geographic/product mix. Adjusted operating profit was up 2% in the quarter despite the tough macroeconomic environment where most retail and consumer companies are witnessing margin declines. P&G's productivity improvement and cost-saving programs combined with favorable revenue growth led to the operating profit expansion.

Segment Discussion

Beauty : Beauty products grew 1% (2% organically) to $4.8 billion driven by pricing growth. Price increases added 5% to revenue growth whereas mix reduced it by 4%. Volumes were up 1%. Volume gains in the Hair Care and Prestige Products offset weakness in Skin Care, Personal Care and Cosmetics.

The segment's net earnings were up 3% to $523 million as benefits from revenue growth and a lower tax rate partially offset decline in operating margins Operating margins contracted due to rising commodity costs and unfavorable mix.

Grooming : Grooming products were flat (2% organically) at $2.0 billion. Price increases added 3% to revenue growth whereas product mix reduced it by 2%. Volumes were up 1% with both Shaving Care and Appliances sub-segments witnessing low-single digit volume growth.

The segment witnessed gross margin declines again due to rising commodity costs and unfavorable geographic/product mix. Net earnings declined 4% to $398 million due to gross margin contraction.

Health Care : Healthcare products increased 2% (2% organically) to $3.0 billion. Price increases added 3% to revenue growth while volumes were flat. Volume gains in the Feminine Care segment were offset by declines in the Oral Care and Personal Health Care. The segment's net earnings were down 4% to $411 million due to gross margin headwinds.

Fabric Care and Home Care : The segment grew 1% (2% organically) to $6.6 billion as pricing gains were offset by volume declines. Price increases added 7% to revenue growth whereas mix and volumes reduced it by 2% and 3%, respectively.

All the three sub-segments - Home Care, Fabric Care and Pet Care - witnessed volume declines in the quarter. The segment's net earnings were down 9% to $716 million due to soft sales and operating margin declines (due to rising commodity costs and lower gross margins).

Baby Care and Family Care : The segment grew 5% (6% organically) to $4.2 billion driven by volume growth. Price increases added 5% to revenue growth whereas mix reduced it by 2%. Volumes were up 3% with the sub-segments - Baby Care and Family Care - registering low-single digit increases in volume.

The segment's net earnings increased 5% to $573 million driven by sales growth and improvement in operating margins. Operating margins expanded due to higher gross margins (driven by price increases and cost savings) and lower sales, general & administrative costs (as a percentage of revenue).

Overall, almost all the business segments witnessed volume gains in the fast growing developing nations as against their developed counterparts which are currently suffering from low consumer disposable incomes and saturated markets.

In February this year, P&G announced an agreement to spin-off its snacks unit which included the popular brand, Pringles, to leading cereal maker The Kellogg Company ( K ). The deal is expected to close by the end of June 2012.

Outlook

In fiscal 2012, the consumer goods giant is expected to post sales growth of 4%, both reported as well as organic. Pricing benefits are expected to add 4% to revenue growth whereas mix is expected to reduce it by 1%. Foreign exchange is expected to have a neutral impact on revenue growth.

Previously, the company was expecting organic sales to inflate by 4%-5% in fiscal 2012. Adjusted earnings are expected to range between $3.82 and $3.88, down 1% from 2011 levels. The Zacks Consensus Estimate currently stands at $3.96 for fiscal 2012.

In the final quarter of fiscal 2012, P&G expects to record sales growth of 2%. Organically sales are expected to be up 4%-5% benefiting mostly from pricing actions. Foreign exchange is expected to pull down the revenue growth by 3%.

Management expects the fourth quarter to see better operating growth than the third quarter benefiting from solid top-line and improved productivity. Adjusted earnings are expected in the range of 79-85 cents per share, down 4%-5% from prior-year levels. The Zacks Consensus Estimate currently stands at $3.96 for the fourth quarter.

Management expects commodity cost pressure to ease a bit in the next quarter though they will continue to be a headwind to earnings. Moreover, the effective tax rate is expected to reduce adjusted earnings by 6%.

Our Recommendation

We currently have a Neutral recommendation on Procter & Gamble. The stock carries a Zacks #3 Rank in the near term (Hold rating).


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: K , PG

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