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P&G Earnings Get Back On Track With Boost From Emerging Markets
1/30/2013 3:43:00 PM
Following a string of poor results during past quarters, Procter & Gamble's ( PG ) latest Q2 2012-13 earnings should come as a huge relief for both investors and the management.
The company renovated its overall strategy during the last quarter, emphasizing a deeper push into emerging markets and competitive pricing in developed markets to fight back against competitors such as Unilever who seemed to be gaining ground on P&G across several product segments during the previous fiscal year.
Emerging Markets Help Push Sales
P&G's net sales for the October-December period stood at $22.2 billion, marking a 2% rise over the same quarter in the previous year. Compare this to the previous quarter, when the company's net sales declined by 4%, and P&G's business finally looks to be on the mend. More numbers to support P&G's general recovery come from market share statistics - P&G held or grew market share in businesses representing nearly 50 percent of sales in the October-December quarter compared to 45% in the previous quarter and only around 30% in the April-June quarter.
The company's rise in net sales were led by 3% growth in organic sales with volume and and improved pricing contributing in equal measures. The growth in organic sales was a balanced one with all business segments up 2% or more. The importance of P&G's focus on emerging markets comes to the front here. Organic sales growth from developing economies were up by 7%, BRIC markets were up 11%, led by Brazil and India with organic sales growth of over 20%.
Bottom Line Improves Against All Odds
The company's improvement in the top line was complemented by a strong bottom line performance. We had mentioned in our pre-earnings review that the company's deeper penetration in emerging markets might weigh on its operating profits. But P&G seems to be successfully tackling issues such as a skewed product mix and increased cost of sales. Core operating profit margin grew 110 basis points, including 160 basis points of productivity improvements and cost saving. A key driver here is the company's cost restructuring program put in place in Q1 2012-13, with which P&G aims to reduce costs by $10 billion by 2016.
The combined effect of top and bottom line improvement was reflected in the company's earnings per share ( EPS ) figures, which stood at $1.39 for the quarter. This is well ahead of the company's own guidance of $1.18 to $1.25 per share. Based on the quarter's better than expected performance, P&G has revised its annual EPS estimate for 2012-13 from $3.97 to $4.07.
Continued Growth In Baby Care And Recovery In Fabric Care, Grooming Remains A Worry
Among product segments, Baby Care registered the most robust performance in line with our expectations. The company's focus on improving sales of diapers in areas such as China and India helped grow net sales by 4% and overall organic sales by 6%.
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Fabric and Home Care, the company's largest segment in terms of revenues, also put in a strong performance with net sales growing by 3%, mostly driven by growth in sales volume.
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The weakest performer in P&G's portfolio was the Grooming segment, which includes the Gillette range of men's grooming products. Net sales in this segment declined by 2% as the company failed to see any traction in volumes despite its recent attempts at leveraging emerging economies .
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We will be updating our $70 price estimate for P&G based on the earnings release.