Procter & Gamble Company (PG) lowered its sales and earnings outlook for the final quarter of fiscal 2012 ending June 2012. This marks yet another cut in the largest consumer goods company’s guidance. The company also introduced preliminary guidance for fiscal 2013 at an investor conference in Paris.
In the final quarter of fiscal 2012, the maker of brands like Tide, Head & Shoulders, Olay and Gillette expects revenues to drop in the range of 1% to 2% versus prior expectations of growth in the range of 1% to 2%. Organically, sales are expected to be up 2% to 3% versus prior guidance of sales growth of 4% to 5%. Foreign exchange is estimated to pull down revenue growth by 4% versus 3% expected previously. Adjusted earnings are expected in the range of 75 cents to 79 cents per share versus 79 cents to 85 cents earlier. The earnings guidance excludes gain of 47 cents to 50 cents on the divestment of Pringles to Kellogg Company (K).
Management blamed the guidance cut on lower-than-expected top-line growth due to a slowing global economy, sluggish market share growth in the developed countries and China, and foreign exchange headwinds.
While P&G sees volume gains in the developing countries, it is witnessing sluggish growth in the developed nations, principally in North America and Western Europe, due to weak economic conditions and competitive activity. The developed markets account for almost 60% of the company’s sales and a higher percentage of profits. Obviously, their underperformance has hurt the company’s growth in both fiscal 2011 and fiscal 2012. Further P&G’s margins are also being persistently hurt by high commodity costs.
For fiscal 2013, P&G expects organic sales growth of 2%-4%. Adjusted earnings growth is expected to be either flat or increase in the mid single digits from fiscal 2012 levels. Foreign exchange is expected to hurt earnings by approximately 4%. Excluding foreign exchange headwinds, earnings are expected to grow approximately in the mid-to-high single-digit range. Management warned that the guidance is subject to change due to volatility in commodity costs, foreign exchange and government regulations. Management has been dealing with business disruption and substantial price reductions in Venezuela following the publication of new price control regulations in the country. The company is also facing import restrictions in Argentina.
The company took blame for failing to create a new category or even a new brand for quite some time. P&G plans to redress the situation by investing in product innovations. The company also reiterated plans to focus on the most profitable consumer markets and geographic regions like the emerging markets which have the largest growth potential. Further, management continues to expect its productivity and cost savings plan announced in February 2012 to generate $10 billion in cost reductions by the end of fiscal 2016. The plan aims to reduce spending across all areas including a workforce reduction of 5,700 by the end of fiscal 2013.
Our Recommendation
We currently have a Neutral recommendation on P&G. The stock carries a Zacks #3 Rank (short-term ‘Hold’ rating).
P&G is going through tough times with lukewarm fiscal third quarter results, a subsequent cut to fiscal 2012 guidance and a recent decline in fourth quarter outlook. Economic slowdown in developed nations and commodity cost increases create persistent overhangs. Despite the near-term weakness, we like the company’s long-term prospects. We are encouraged by the company’s strong brand recognition, diversified portfolio, rapid growth in developing nations, impressive product development capabilities and marketing prowess. We therefore prefer to remain on the sidelines until the company delivers the goods in consistent top- and bottom-line results.
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