Strong Gillette Sales Aren't Enough to Boost Procter & Gamble Co.'s Earnings

By Markets Fool.com

Consumer goods giant Procter & Gamble today posted weaker-than-expected earnings results for its fiscal third quarter. The owner of dozens of billion-dollar brands, including Downy, Crest, and Bounty, also lowered its sales outlook after growth slowed to a crawl.

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Source: Procter & Gamble.

Solid earnings; weak sales
Quarterly earnings met Wall Street's target at $0.92 per share. That translates into a rough 8% drop year-over-year. But the dive was completely driven by foreign exchange issues. Strip out the short-term effect of a relatively strong dollar, and P&G's earnings actually improved by 10% thanks to cost cuts that added a hefty 4 percentage points to its profit margin.

Revenue was also hit hard by exchange rate issues and fell 8% in the quarter. But the story doesn't get much better when you focus on organic sales, which strip out the effect of currency movements. P&G managed just 1% growth in that metric in the third quarter, compared to 2% in each of the prior two quarters and 3% to end its last fiscal year.

And even that minor gain this quarter was due to higher prices rather than increased volume. In fact, volume slipped in four out of P&G's five product lines. The one bright spot was a grooming business boosted by strong results in the Gillette and Braun franchises.

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Product Segment Organic Volume
Beauty, Hair and Personal Care -4%
Grooming 1%
Health Care -1%
Fabric Care and Home Care -1%
Baby, Feminine and Family Care -2%

P&G's overall sales volume fell 2% in the third quarter. Source: P&G financial filing.

Management's focus
Given that tough selling environment, management is aiming to keep slicing costs and non-core brands out of the business. "We are focused on the significant opportunities in our control, including brand initiatives and product innovation, business and brand portfolio simplification, overhead savings and major supply chain productivity initiatives," CEO A.G Lafley said in a press release.

Lafley and his team can point to some good progress along those lines already. Productivity savings lifted operating profit margin by 4.1 percentage points this quarter. Sure, foreign currency changes offset almost all of that gain, but those negative issues are temporary while P&G's lower cost structure should keep helping results long after the currency swings calm down.

However, investors will have to endure more short-term pain before those benefits start to show up in higher sales and profits. Management today downgraded P&G's full-year organic sales growth outlook. They now see sales improving by "low single digits" rather than the "low-to-mid single digits" that the team was targeting a quarter ago. Reported earnings, hammered by currency exchange, should fall by as much as 22% on the year.

The article Strong Gillette Sales Aren't Enough to Boost Procter & Gamble Co.'s Earnings originally appeared on Fool.com.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.