What to Watch When Procter & Gamble Co. Posts Earnings Thursday

By Markets Fool.com

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Source: Procter & Gamble.

Consumer-goods giant Procter & Gamble is scheduled to post fiscal-fourth-quarter earnings results before the market opens on Thursday, July 30. Here's a big-picture look at the numbers P&G is expected to announce as compared with the prior-year period:

Metric Q4 2014 Expected Q4 2015 (Change)
Revenue $20.2 billion $18 billion (-11%)
Profit $0.93 per share $0.95 per share (+2%)

Expected Q4 is the average of the 20 analysts who cover the stock. Source: Yahoo! Finance and P&G financial filings

Another challenging revenue quarter
"Challenging" has been a recurring theme from P&G's management throughout this fiscal year. Weak demand in developed and emerging markets held organic revenue growth to 2% in the first two quarters of FY 2015 and just 1% last quarter. By comparison, 4% organic growth -- like P&G booked in fiscal 2011 -- constitutes solid gains.

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Investors are likely to hear more about challenges on Thursday. Organic growth should be around 1% to 2% this quarter. Don't worry so much about the expected 11% revenue nosedive -- that slump is all about foreign exchange swings and sold-off business lines, not cratering demand for diapers and laundry detergent.

Still, within that organic growth metric it's important to know what's powering the 1% to 2% gains. Last quarter's improvement, for example, came completely from price increases as opposed to higher sales volumes. In fact, P&G booked 2% lower volume overall and four of its five product divisions shrank. If that happens again in the fourth quarter, we'll know P&G hasn't seen any meaningful boost in global demand.

What management can control
On the bright side, the company's productivity improvements are already here -- and they're huge -- even if they're being swamped by foreign currency swings at the moment. P&G is on pace to cut $1.6 billion of annual costs out of its business this year, with $1.2 billion completed as of the end of the third quarter.

Those cuts lifted operating margin higher by 4 percentage points in Q3 but currency shifts reduced the reported improvement to just half of a percentage point. Once those exchange rate issues stop hurting profits, investors should see a significant, sustainable jump in profitability. In fact, management expects currency-neutral earnings to grow by double digits for the full year.

PG Operating Margin (TTM) Chart

PG Operating Margin (TTM) data by YCharts

Strategic updates
Investors will get important updates on P&G's broader operating strategy now that its brand-shedding initiative is complete. For more than a year, CEO A.G. Lafley and his team have been working to slim P&G down to just 75 of the leading brands with the best potential for long-term sales and profit growth. Their vision has been to create a more agile company that can quickly shift with changing consumer tastes.

The powerhouse franchises that remain, including Pampers diapers, Gillette razors, and Tide detergent, should benefit from higher innovation and marketing support.

Source: P&G investor presentation.

Meanwhile, this earnings release promises to pack more high-level discussion than usual as P&G confirmed Tuesday thatDavid S. Taylor, group president of global beauty, grooming and health care, will succeed Lafley as president and Chief Executive Officer on Nov. 1. Taylor joined P&G in 1980.

The incoming CEO will step into the huge challenge of how to get sales growth back on track. But the new leader will be taking the reins on a company that has a much lower cost structure -- and is easier to manage -- than the one that Lafley was greeted with when he stepped into the lead job two years ago.

The article What to Watch When Procter & Gamble Co. Posts Earnings Thursday originally appeared on Fool.com.

Demitrios Kalogeropoulos owns shares of Apple. The Motley Fool recommends Apple and Procter & Gamble. The Motley Fool owns shares of Apple. 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.