Procter & Gamble (
), the world's leading consumer goods company, posted 4% y-o-y rise
in organic sales (excludes the impact of acquisitions/disposals and
foreign currency movements) in Q1. This was at the higher end of
its guidance due to strong organic sales growth (8%) in the
developing economies. Overall, while volumes increased 4% y-o-y,
other forces such as pricing and mix were essentially neutral.
Net sales increased 2% y-o-y to $21.2 billion, as currency
headwinds in Japan, Venezuela and some of the key emerging markets,
offset the impact of organic sales growth by 2%. The company's net
income rose 8% to $3 billion, benefiting from lower selling,
general and administrative expenses, and lower tax rates.
P&G's fabric & home care segment and baby, feminine
& family care segment delivered organic sales growth in excess
of 5% y-o-y, while beauty, grooming and healthcare segments
underperformed with only 0-1% increase in organic
sales. P&G derives close to 25% of its revenues from
beauty products. The lackluster performance of the beauty
division has been stirring concern among investors, suggesting that
more needs to be done in beauty.
price estimate of $74 for Procter & Gamble
marks our valuation at a discount of about 10% to the market
See our complete analysis of Procter &
Beauty Division Could Rejuvenate With New Product
P&G's beauty portfolio includes iconic brands like SK-II,
Hugo Boss, Dolce & Gabbana, Gucci, Lacoste, James Bond 007,
Head & Shoulders, Olay and Pantene. Organic sales in beauty
increased only 1% y-o-y in Q1 FY 2014, as 2% y-o-y higher volumes
were offset by 1% impact of unfavorable geographic and product
Some of P&G's beauty products performed weaker than others
in Q1. For instance, while personal cleansing, cosmetics and
deodorants witnessed healthy organic sales growth, skin care sales
declined during the quarter. The management feels that its salon
professional business also requires increased focus.
We expect the appetite for premium brands among consumers to
increase as the global economy recovers. Additionally, P&G has
built a strong pipeline of innovations that should help it bring
the business back on track. The management conveyed that these
innovations will be brought to the market in Q2 and Q3, although it
did not give any further details on the launches. P&G's
efforts should help revive the beauty division; however, high
promotional activity from competitors ahead of these launches could
hold back growth.
Based on the above mentioned factors, we estimate P&G's
beauty division will gain market share in the future. However, the
increase will be small due to high competition in the segment,
adverse affects of product mix in emerging markets and cost-saving
measures that may eat into the company's marketing budgets.
Gross Margin Likely To Expand In The Future
P&G announced a restructuring program in 2012 through which
it aimed to save $10 billion in costs. Under this program, the
company will save $6 billion in costs of goods sold, while another
$1 billion and $3 billion, from marketing efficiencies and
non-manufacturing overhead, respectively. Like previous quarters,
P&G's cost-saving initiative supported the company's gross
margins in Q1.
Core gross margin, excluding the effects of one-time costs and
restructuring activities, fell by 1.3% in Q1 to under 50%. This was
the result of 1.6% increase in cost-savings being offset by
geographic and category mix, foreign exchange, higher commodity
costs and higher manufacturing start-up costs. The main impact was
from expansion into lower margin geographies and product categories
that reduced core gross margin by 1.4%.
P&G is working to reduce cost structures in the developed
markets that will help it cut down costs and inventory. The
company delivered cost-savings ahead of its plan in FY
2013, and has increased its full year expectations for cost-savings
in FY 2014 from $1.2 billion to $1.4 billion. This should provide
increased support to gross margins going forward. Moreover, as the
company strives to lift its beauty division, we think that gross
margins will expand as beauty is a higher margin business compared
to other product categories such as fabric care and paper.
We are in the process of updating
our $74 price estimate for Procter & Gamble
based on the Q1 FY 2014 results.
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