Back to top

Analyst Blog

Despite worse-than-expected currency headwinds, The Procter & Gamble Company (PG - Analyst Report) reported mixed fiscal second-quarter 2014 results beating the Zacks Consensus Estimate for earnings but missing the same for sales. Pricing improved in the quarter and margins were better than the previous quarter. The consumer products giant also maintained its financial outlook for fiscal 2014.

P&G’s second-quarter fiscal 2014 adjusted earnings (excluding restructuring charges) of $1.21 per share beat the Zacks Consensus Estimate of $1.20 by a penny. However, earnings declined 1% in the quarter largely due to currency headwinds of 11 cents per share. Currency headwinds were worse than management’s expectation of a headwind of 9 cents same as in the first quarter.

Excluding currency headwinds, earnings increased 8% in the quarter as volume growth, pricing gains, cost savings and lower taxes made up for the lower margins in the quarter.

P&G’s net sales were flat at $22.28 billion due to a 3% headwind from currency. Top line slightly missed the Zacks Consensus Estimate of $22.343 billion. With around 60% of the company’s business generated outside North America, a strong dollar lowered the value of international sales.

Revenues and Margins

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 3% due to growth in both volume and pricing.

The Health Care segment showed the strongest organic sales growth of 5% in the quarter due to innovation in Oral Care and Personal Health Case businesses. Both the Grooming and Baby/ Feminine/ Family Care segments grew 3% driven mainly by product innovation.

The Fabric Care/Home Care grew 4% organically as innovation and market expansion into developing countries aided growth in Fabric Care and Home Care businesses. The Beauty division continued to struggle delivering flat growth as gains from market growth and innovation in Prestige, Hair Care, Deodorants and Personal Cleansing businesses were offset by lower Skin Care sales.

Despite manufacturing savings and pricing gains, core gross margin declined 90 basis points (bps) to 50.3% due to unfavorable geographic/product mix, currency headwinds and higher commodity costs.

Core selling, general and administrative expenses (SG&A) improved 80 bps (as a percentage of sales) to 29.4% due to productivity/overhead savings and marketing spending efficiency. Core operating margin declined 10 bps to 20.9% as gains from a lower SG&A ratio were offset by lower gross margins. However, both gross and operating margins improved sequentially in the second quarter.

Fiscal 2014 Outlook Retained

Core earnings per share are expected to grow in the range of 5%–7% in fiscal 2014. Earnings growth is expected to be second-half weighted as several headwinds which hurt the first-half earnings growth are expected to dissipate in the second. Earnings are expected to improve in the second half driven by accelerated productivity gains and cost savings and moderating currency headwinds.

Management expects organic sales to increase between 3% and 4% in fiscal 2014, better than the 2013 growth rate of 3%. Net revenue is expected to rise between 1% and 2%. Currency is expected to hurt revenues by 2%.

Other Stocks to Consider

P&G carries a Zacks Rank #4 (Sell). Some better-ranked consumer staples companies include Post Holdings, Inc. (POST - Snapshot Report), Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report), and The Hain Celestial Group, Inc. (HAIN - Analyst Report). While Post Holdings and Green Mountain carry a Zacks Rank #1 (Strong Buy), Hain Celestial has a Zacks Rank #2 (Buy).

Please login to Zacks.com or register to post a comment.