P&G Tops Q1 Earnings on Solid Margins, Sales Remain Weak

The Procter & Gamble CompanyPG reported mixed first-quarter fiscal 2016 earnings as earnings beat expectations but revenues missed. Though the company cut the all-in-sales guidance, it maintained the organic top-line expectations.

Earnings Beat

The consumer giant's first-quarter adjusted earnings of 98 cents per share beat the Zacks Consensus Estimate of 94 cents by 4.3%. However, earnings declined 1% year over year due to currency headwinds of nearly 13% (13 cents per share). Excluding the currency headwinds, earnings increased 12% as strong margins offset the weak top line.

Adjusted earnings excluded restructuring costs, including which earnings came in at 91 cents, up 32% year over year.

The Procter & Gamble Company - Quarterly EPS | FindTheBest

Revenues Remain Weak

P&G's net sales declined 12% to $16.53 billion as steep currency headwinds hurt sales significantly, thereby lowering the value of international sales.

With around 60% of the company's business generated outside North America, currency headwinds affected sales by 9% as a strong dollar lowered the value of virtually every currency in the world.

The top line also missed the Zacks Consensus Estimate of $17.0 billion by 2.8% - for the seventh time in a row.

Currency headwinds, brand divestures and management's portfolio-reshaping efforts hurt sales. Since last year, P&G has been carrying out portfolio strengthening and simplification plans to streamline its business and focus more on the biggest brands. Under the plan, that is nearing completion, the company has eliminated almost 60% of the brands (roughly 100 brands) that were witnessing decline in sales and profits to focus on 65 core brands.

Under the plan, P&G entered into a deal to sell four product categories, comprising 43 beauty brands to Coty Inc. COTY in July this year. Last year, the company sold off its American and Asian pet care business to Mars, Inc. and the European pet care business to Spectrum Brands Holdings, Inc. SPB .

Moreover, the company has signed a deal to divest its Duracell batteries business to Berkshire Hathaway, Inc. BRK.B in exchange for Berkshire's equity stake in P&G. The Coty and Duracell transactions are expected to close soon. In addition, the company has exited the Bleach business, Vicks VapoStream, Camay and Zest bar soap brands, and several skin care and fragrance brands.

Though this plan should boost results over the long term, divesting these unprofitable businesses is hurting near-term sales.

Venezuelan deconsolidation and minor brand divestitures hurt sales by 2%.

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues declined 1%, as pricing gains made up for the softer volumes. Pricing benefited sales by 2%, offsetting an organic volume decline of 4% as a result of the challenging operating environment. Mix had a 1% positive impact on sales. Management is optimistic of recording positive organic sales growth in the second quarter.

None of the business segments recorded positive organic sales growth. While organic sales declined in a low single-digit range in the Beauty, Health Care and Baby, Feminine and Family Care segments, it remained flat in the Fabric Care and Home Care and Grooming.

Margins Rise

Core gross margin improved 250 basis points (bps) to 51.1% driven by productivity cost savings and pricing benefits. Excluding the Fx impact, core gross margin was up 310 bps.

Core selling, general and administrative expenses (SG&A) improved 20 bps (as a percentage of sales) to 27.9% as overhead and marketing savings were offset by investments in sales force and lower sales. Excluding the Fx impact, SG&A ratio improved 10 bps.

Core operating margin increased 270 bps to 23.2%, backed by higher gross margin and lower SG&A costs. Excluding currency headwinds, operating margin was up 320 bps, primarily backed by 260 bps productivity savings.

Fiscal 2016 Guidance

The company expects net revenue to decline in high single-digits in fiscal 2016, worse than prior expectation of low-to-mid single-digit range due to higher-than-previously-expected headwinds from currency and brand divestures. Currency is expected to hurt revenues by 5-6%, higher than previous expectation on 4-5%.

Moreover, minor brand divestures combined with deconsolidation of results of Venezuelan subsidiaries is expected to hurt sales by 2-3%. Organic sales guidance was, however, maintained at flat to up in low single-digits.

The company still expects core earnings per share to be down slightly to up in mid single-digits, as against restated core EPS of $3.77 reported in fiscal 2015.

The Zacks Rank #3 (Hold) company stated that the pending exit of several Beauty categories as well as Duracell will be accounted for as discontinued operations. The transitioning brands have not therefore been included in core EPS for either fiscal 2015 or 2016. P&G stated that it expects fiscal 2015 core EPS, based on earnings from continuing operations, to be restated from $4.02 reported above to approximately $3.76 (previously $3.77).

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PROCTER & GAMBL (PG): Free Stock Analysis Report

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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 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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