Personal Finance

How Procter & Gamble Can Overcome Its Biggest Challenges

A customer shops for detergent.

Procter & Gamble (NYSE: PG) recently closed out its 2018 fiscal year, and the growth results weren't impressive. The consumer products titan saw its sales gains slow compared to the prior year despite management's hope that growth would accelerate.

In a conference call with Wall Street analysts , CEO David Taylor and his team explained why they are still optimistic about the health of the business, both in terms of growth and profitability. Executives also provided details to back up their aggressive forecast for faster organic sales growth in the current fiscal year. Below are a few highlights from that discussion.

A customer shops for detergent.

Image source: Getty Images.

Sales trends are better than they look

[S]ales growth was softer than we want, but [market] share is showing why I am confident the interventions are working and moving us forward in a sustainable way.-- Taylor

P&G's 1% organic sales growth for the quarter left overall growth at 1% for the year, which was below the 2% rate that executives had predicted back in April and also trailed the 2.5% goal they had targeted back in January. For investors keeping track, that's now two consecutive fiscal years that P&G has failed to achieve its modest growth objectives.

Yet executives said that sales growth trends aren't as bad as they might appear. The overall rate was just shy of rounding up to 2%, they explained. P&G also improved its market-share trends in key geographies like China and the U.S. and across several brands, including Old Spice, Febreze, Ariel detergent, and Swiffer. Overall, eight of its 10 core product categories held or expanded market share in a difficult selling environment.

Big challenges

We have more work to do to accelerate results. We clearly are operating in a very dynamic environment, [with] changing government policies, including tax, trade, and privacy, retail transformation, disruption of the media ecosystem, rising input and transportation costs, and foreign exchange headwinds, with highly capable multinational and local competitors determined to win.-- Taylor

P&G faced more than its fair share of challenges during the quarter, and management outlined a few of the biggest, including major shipping disruptions in Brazil, a sharp economic contraction in Saudi Arabia, and soaring inflation in Egypt and Nigeria. These country-specific issues combined with competitive challenges against its core baby-care and shaving franchises to make it more difficult to grow.

Yet executives said they have faith that their strategic initiatives are working. "We are structuring an organization and building the culture that continues to put us in front of change, riding the wave of this dynamic environment, versus being hit by it," Taylor said.

Margin strength

Our current 21.6% core operating-profit margin is among the highest in the industry, and we continue to hold advantages in below-the-line costs. We borrow at some of the most favorable rates in the industry. We have a tax rate that is among the industry's lowest. All of this leaves us with a core after-tax profit margin of nearly 17%, one of the highest after-tax margins in the industry with three years of the [cost-cutting] programs still ahead of us.-- CFO Jon Moeller

Rising commodity costs and reduced prices pushed profit margin lower this quarter, just as they have for rivals like Kimberly-Clark . The bigger picture, management argued, shows that P&G enjoys a durable competitive advantage when it comes to profitability. Its operating margin is well above Kimberly-Clark's and Unilever 's, which should give it powerful ammunition to direct toward innovation, marketing, and product improvements.

Prices are headed higher

We're taking a price increase of around 4% on Pampers diapers in North America [and] ... we began notifying customers across North America that we're taking a list-price increase on Bounty, Charmin's, and Puffs brands which averages around 5% across the category on an annual basis.-- Moeller

Management issued a bold forecast for fiscal 2019 that predicts organic growth will speed up to between 2% and 3%. Pricing trends will be negative early in the year, it said, but will start lifting results in later quarters. P&G went so far as to forecast significantly higher sales volumes despite aggressive price increases that it plans to implement over the next few months.

Hitting these targets, which has been a challenge for P&G lately, would imply that significantly stronger growth is on the way.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

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

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

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