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Procter & Gamble Navigates Soft Sales With Cost-Saving Plans

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The Procter & Gamble Company (PG - Free Report) or P&G has been struggling to boost sales for the last few quarters. A soft consumer spending environment in the United States and slowing global market growth are pressing concerns for the company.

Resultantly, P&G's shares have gained only 5% so far this year, underperforming the industry’s growth of 14.2%.

Also, the trend in current-quarter and current-year earnings estimate revisions is not satisfactory as it has remained stable over the past 30 days. Nonetheless, this $65-billion conglomerate remains focused on balanced growth through improved product, packaging, and marketing initiatives and productivity cost-saving plan.

Initiatives to Counter Slow Sales Growth

P&G’s sales have remained subdued in recent quarters with net sales increasing a meager 1% in its first quarter of fiscal 2018. Organic sales increased 1% in the quarter, softer than the last quarter’s 2% growth. The slower growth rate was due to the challenges thrown by a tough base period comparison and 40 basis points (bps) impact from recent targeted pricing actions in U.S. blades and razors and ongoing portfolio clean-up efforts. Natural disasters were a further 30 bps headwind in the quarter as well.

Importantly, this 1% organic sales growth was driven by volume instead of pricing, which has been flat. P&G could not push its prices up and has seen some inflation in input costs. Hence, margins have been trending down a bit despite continued productivity gains.

Global category growth was below 2.5% during the quarter, a modest deceleration from the fourth quarter of fiscal 2017, with much of this slowdown occurring in the United States. While developing market growth was around 5%, developed market growth was just 0.5%. Weakening global share reflects poor execution in key markets of the company’s business.

Nevertheless, management has outlined priorities to accelerate top and bottom-line growth. Importantly, in order to boost its profit level, P&G is re-working its supply chain to lower cost, reduce inventory and improve customer service levels by closing down underperforming plants, setting up new multi-category facilities, localizing manufacturing, upgrading, automating and standardizing operations and employing smart automation and digitization. Currently, the company expects to generate up to an additional $10 billion of cost savings over the next five years (fiscal 2017-2021) in areas including supply chain and cost of goods sold, marketing and digitization and promotional spend effectiveness.

P&G’s adjusted earnings in the last reported quarter increased 6% from the year-ago level aided by productivity cost savings. SG&A expenses, as a percentage of sales, improved 10 bps helped by productivity savings from overhead, agency fee and ad production costs.

In addition to cost cutting, P&G is focused on initiatives to boost its top line. Management has focused its priorities behind its four largest categories: Baby Care, Fabric Care, Hair Care, and Grooming and its two largest markets: the United States and China.

The latest acquisition of Native, a startup competitor that specializes in direct-to-consumer personal care products, speaks off the company’s efforts to reinvigorate investors’ confidence. Although the financial terms of the deal were not disclosed, it marks P&G's first buyout in eight years.

Zacks Rank & Stocks to Consider

P&G currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks from the same sector are Pilgrim's Pride Corporation (PPC - Free Report) and Tyson Foods, Inc. (TSN - Free Report) , sporting a Zacks Rank #1 (Strong Buy), and Unilever PLC (UL - Free Report) , with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Pilgrim's Pride is expected to register 62.7% EPS growth this year.

Tyson Foods has an expected EPS grow rate of 9.4% for this year.

Unilever PLC projects earnings growth of 26% for 2017.

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