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P&G Beats Earnings; 4Q View Weak

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Procter & Gamble Company (PG - Free Report) reported mixed fourth-quarter results beating earnings but missing on sales. Its fourth-quarter outlook was also quite subdued with earnings expected to decline from the year-ago results.

P&G’s third-quarter fiscal 2013 adjusted earnings (excluding restructuring charges) of 99 cents per share surpassed the Zacks Consensus Estimate of 96 cents by 3.1%. Earnings also beat management guidance of 90 cents to 96 cents and improved 5% from the prior-year level as strong cost savings, lower taxes and reduced share count made up for the sluggish revenues in the quarter.

Adjusted earnings excluded restructuring charges and charges for balance sheet revaluation related to Venezuelan currency devaluation.

The consumer products giant’s net sales increased 2% to $20.6 billion in the quarter. The sales growth rate was however below management’s expectations of growth in the range of 3%-4% due to higher-than-expected foreign currency headwinds. P&G’s net sales also slightly missed the Zacks Consensus Estimate of $20.67 billion.

Globally, P&G maintained or grew its share in businesses comprising over 50% of sales in the quarter, same as in the last quarter. P&G however saw improving market share trends in North America, as it maintained or grew its share in businesses comprising over 75% of sales, much higher than 60% in the last quarter.

Revenues and Margins

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 3%, at the lower end of management’s guidance of a range of 3%-4%. We believe that the lukewarm organic sales growth may be due to weak beauty sales in the quarter.

Broad based price increases added 1% (lower than second quarter) to revenue growth. Foreign exchange hurt revenues by 1%, higher than management’s expectation of a neutral impact. Volumes grew 2% in the quarter, while geographic/product mix remained flat.

The Health Care segment, which includes brands like Oral-B and Vicks was the strongest, delivering organic sales growth of 8% and organic volume growth of 5%. The business gained from increased innovation and portfolio expansion. The Beauty segment was the weakest as P&G’s hair and skin care businesses are struggling due to increased promotional activities by competitors.

Core gross margin increased only 20 basis points (bps) to 50.0% as pricing and productivity gains were offset by headwinds from geographic/product mix and increased start-up costs. Core selling, general and administrative expenses (SG&A) increased 10 bps (as a percentage of sales) at 31.2% in the quarter, as overhead savings were offset by higher marketing costs. Core operating margin improved only 10 bps to 18.8% in the quarter due to sluggish gross margins and higher SG&A costs. Both the gross and operating margins declined from the second-quarter levels.

Fiscal 2013 Outlook Tightened

The company tightened its fiscal 2013 core earnings guidance from $3.94 – $4.04 to $3.96 – $4.04. We would like to remind investors that the earnings guidance was lowered in mid-Feb 2013 to include headwinds from the Venezuelan currency devaluation. The present guidance represents earnings growth of 3%-5% from fiscal 2012 levels.

The top-line guidance was however maintained. Management expects organic sales to increase between 3% and 4%. Net revenue is expected to rise between 1% and 2%. Currency is expected to hurt revenues by 2%.

The company expects to meet its full-year targets on the back of stronger productivity improvements, cost savings and higher share repurchases. This fiscal year, the company expects to repurchase shares worth $6 billion, at the higher end of its previously provided range of $5 billion–$6 billion.

Fiscal 2012 was a tough year for P&G and the company is trying to re-invigorate through some turnaround plans. P&G has laid out plans to improve results in developed markets while maintaining momentum in the developing nations. The company is focusing resources on the 40 largest and most profitable businesses, most of which are in developed markets. These businesses account for about 50% of sales and 70% of operating profit. The company is also focusing on driving its 20 biggest innovations like Tide Pods, Always Radiance, Bounty Trap & Lock and Bounty Unstoppables in more markets in fiscal 2013. Moreover, the company is also concentrating on its 10 most important developing markets. In addition, the company has implemented costs-savings and productivity-improvement initiatives in order to improve margins.

Fourth-Quarter 2013 Outlook Lags

In the fourth quarter, the company expects to earn 69 cents to 77 cents, representing a year-over-year decline in the range of 6% - 16%. The earnings outlook also fell short of the Zacks Consensus Estimate of 82 cents.

Organic revenues are expected to range between 3% and 4%. Foreign exchange is expected to hurt sales by 2%. Accordingly, net sales are expected to increase in the range of 1%-2%.

P&G carries a Zacks Rank #3 (Hold). Another consumer products giant, Kimberly-Clark Corporation (KMB - Free Report) announced solid first-quarter results last week, beating the Zacks Consensus Estimate for both revenues and earnings.

Other Stocks to Consider

Some consumer staples companies currently doing well and are worth considering include Flower Foods Inc. (FLO - Free Report) – Zacks Rank #1 (Strong Buy) and Kraft Foods Group, Inc. - Zacks Rank #2 (Buy).

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