P&G Tops Estimates, Keeps EPS View - Analyst Blog

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Procter & Gamble Company ( PG ) reported first quarter fiscal 2013 adjusted earnings (excluding restructuring charges) of $1.06 per share, which largely surpassed the Zacks Consensus Estimate of 96 cents as well as management guidance of 91 cents-97 cents. Earnings also improved 5% from the prior-year level driven by broad based organic sales growth and gross margin expansion.

The consumer products giant's net sales dropped 4% to $20.74 billion in the quarter. The sales decline was however at the favorable end of management expectations of a shortfall of 4% to 6% due to improved sales in its U.S. markets. In U.S., P&G grew or maintained share in businesses comprising nearly 60% of sales. P&G's net sales were almost in line with the Zacks Consensus Estimate of $20.73 billion.

Slowdown in developed nations and commodity cost increases had resulted in a series of disappointing earnings results and guidance cuts for P&G. However, first quarter 2013 as well as the fourth quarter 2012 results came in much better than past quarters. Following the impressive results in the first quarter, P&G maintained its organic sales growth and core earnings guidance for fiscal 2013.

Revenue and Margins

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 2% as pricing benefits offset headwinds from product/geographic mix and foreign exchange. The organic revenue growth was at the higher end of management guidance.

Broad-based price increases added 2% to revenue growth. Foreign exchange hurt revenues by 6% as expected by management. Volume and geographic/product mix were flat in the quarter.

Core gross margin increased 80 basis points to 50.6% as pricing gains and cost savings offset headwinds from geographic/product mix. Core selling, general and administrative expenses (SG&A) declined 10 basis points (as a percentage of sales) to 30.0% in the quarter, due to lower overhead costs. Core operating profit was up 1% in the quarter due to gross margin expansion and cost savings.

Segment Discussion

Though net sales declined in all the segments due to currency headwinds, four of the five business segments showed positive organic growth.

Beauty : Beauty products declined 7% from prior year (down 2% organically) to $4.9 billion in the reported quarter as price increases were offset by headwinds from volume, mix and currency. Price increases added 2% to revenue growth, whereas mix reduced it by 1%. Foreign exchange had a negative impact of 5% on revenues.

Volumes were down 3%. Organic sales growth in the Salon Professional and Prestige businesses were offset by declines in Hair Care and Beauty Care. Net sales were however down in all the businesses due to unfavorable impact of currency.

Grooming : Grooming products declined 7% to $2.0 billion mainly due to currency headwinds of 8%. Organically revenue increased 2%. Price increases added 3% to revenue growth, whereas product mix reduced it by 1%. Volumes were down 1%. Organic sales growth in the Shave Care segment was offset by declines in the Appliance business. Net sales were down in both the businesses due to unfavorable impact of currency.

Health Care : Healthcare products declined 4% to $3.17 billion largely due to currency headwinds of 6%. Organically revenue grew 2%. Price increases added 2% to the revenue growth, while mix added 1%. Volumes declined 1%. Organic sales growth in the Oral Care and Feminine Care segment were offset by declines in the Personal Health Care segment. Net sales were however down in all the businesses due to unfavorable impact of currency.

Fabric Care and Home Care : The segment declined 2% to $6.9 billion largely due to currency headwinds of 5%. Organically revenue grew 2%. Price and mix added 2% and 1%, respectively, to the revenue growth. Volumes were flat in the quarter. Organic sales growth in the Fabric Care and Home Care segments were offset by declines in Batteries. Net sales were however down in all the businesses due to unfavorable impact of currency.

Baby Care and Family Care : The segment declined 2% to $3.99 billion largely due to currency headwinds of 5%. Organically revenues grew 3% driven by price and volume growth. Price increases added 3% to the revenue growth, while volumes were up 2%. Mix pulled down revenues by 2%. Both Baby Care and Family Care businesses showed positive organic sales growth.

Fiscal 2013 Outlook

Management continues to expect organic sales to grow in the range of 2% to 4%. Net revenue are expected to remain flat or increase upto 1% from 2012 levels, better than prior expectations of remaining in line or decline upto 2% from 2012 levels. Currency is expected to hurt revenues by 2% to 3%, lower than prior expectations of 4%.

The company also maintained its previously provided core earnings guidance range of $3.80-$4.00, which represents a year-over-year movement of a negative 1% to a positive 4%.

Fiscal 2012 was a tough year for P&G and the company plans to implement some meaningful changes to re-accelerate its top and bottom-line growth keeping in pace with the peer companies. The company has laid out plans to improve results in developed markets while maintaining momentum in the developing nations. Moreover, the company will increase focus on the most profitable business, its biggest innovations and further accelerate cost savings.

Second Quarter 2013 Outlook

In the second quarter of fiscal 2013, the company expects revenues to range between negative 1% to a positive 1%. Organic sales are expected to grow between 1% and 3%. Foreign exchange is expected to hurt revenue growth by 2%. Core earnings are expected to remain in the range of $1.07 to $1.13, representing a movement in the range of negative 2% to positive 4%.

Our Recommendation

We currently have a Neutral recommendation on Procter & Gamble. The stock carries a Zacks #2 Rank in the near term (Buy 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.



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