Procter & Gamble Co's Biggest Win in 2016 So Far

By Markets Fool.com

Image source: Getty.

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Procter & Gamble (NYSE: PG) just closed the books on a fiscal year in which sales declined by 8%. Earnings didn't fare much better: P&G's core profit ticked down by 2% following a 2% drop last year.

Organic sales growth, which strips out the effect of currency swings and brand divestments, weighed in at just 1%, compared to 2% in the prior year. Rival Unilever (NYSE: UL) posted a healthier 5% sales jump.

Yet a major bright spot in P&G's latest results is the fact that -- for the first time in over a year -- they achieved broad-based gains in sales volumes.

Why volume matters

Organic growth forms the foundation of P&G's entire operating model. Executives' No. 1 goal, they explain in the 10-K report, is "organic sales growth above market growth rates," which is the engine behind profit gains in the mid-to-single digits. That simple formula has broken down over the past few years as the company has struggled to gain -- or in some cases, defend -- market share.

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Organic growth has two components, pricing and volume, meaning P&G can manage gains by simply boosting average prices. However, that's not a sustainable approach, since consumers will eventually switch to competing brands. Instead, the aim is for a balance between pricing and volume gains. And if there's going to be an imbalance, it should be on the volume side.

Unilever prioritizes "volume-driven" growth and has delivered on that goal lately. Sales volume was up 2.2% over the last six months while pricing improved by 2.5% to deliver an overall 4.7% revenue jump. In contrast, P&G's volume decreased by 3% over the past 12 months, and so it was only through price hikes that the company managed to eke out 1% organic growth for the fiscal year.

Improving results

That negative trend shifted in the summer quarter. Volume in the April to June period rose across P&G's five major sales categories. In most cases it also made up a larger portion of organic growth than price increases did:

Category

Organic Volume

Organic Sales

Beauty

1%

1%

Grooming

2%

7%

Health care

5%

8%

Fabric and home care

2%

1%

Baby, feminine and family care

2%

1%

Fiscal Q4 growth results by category. Data source: P&G financial filings.

CEO David Taylor and his executive team credited higher investments in advertising, sales, and marketing for helping deliver the boost. As examples, they cited advertising and sampling programs that helped convince 2 million young men to try Gillette Fusion FlexBall razors. Increased spending in the Pampers brand also means that more than two-thirds of new moms will try P&G products through its prenatal and hospital programs.

Looking ahead

The company aims to keep its volume momentum going by boosting advertising spending as a percentage of sales this year. The good news is that it shouldn't drag profits down since P&G is raising cash from aggressive cost cuts. Having already sliced billions out of its expense infrastructure, management plans to deliver another $10 billion of savings over the next five years. Most of that cash will go toward initiatives to boost sales growth, and the rest will go back to shareholders in the form of dividends and stock repurchases.

Even with the recent improvement, P&G is growing at a pace that suggests overall market share declines. "We're not yet where we need to be. There's more work to be done," Taylor admitted to investors in a July conference call.

The progress is encouraging, though. Organic growth was flat through the first half of fiscal 2016 before rising at a 1.5% pace for the second half. After over two years of nonexistent sales gains, even that small improvement is cause for optimism about P&G's long-term outlook.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Procter and Gamble and Unilever. 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.