Procter & Gamble Co Growth Picks Up Steam

By Markets Fool.com

Procter & Gamble (NYSE: PG) is on a roll. The consumer goods giant this week posted its fastest pace of quarterly sales growth in nearly three years. And, despite a sluggish overall industry, P&G managed to boost market share while producing solid earnings gains as well.

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Here's how the big-picture results stacked up against the prior-year period:

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Revenue

$16.5 billion

$16.5 billion

N/A

Net income

$2.76 billion

$2.64 billion

5%

Earnings per share

$0.96

$0.93

6%

Data source: P&G financial filings. YOY = year over year.

Sales growth is up

Reported revenue was flat, but organic growth, which strips out the impact of currency changes and brand divestments, rose at a healthy 3% clip. That marked P&G's best showing since the first quarter of 2014.

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Image source: Getty Images.

The company can also claim some solid momentum on this key metric: Organic growth was flat nine months ago before stepping up to a 1% quarterly pace, followed by a 2% pace last quarter.

P&G is even outpacing rivals, for a change. Unilever (NYSE: UL) recently announced a sales growth slowdown as organic gains fell to a 3% rate from the 5% clip the company had enjoyed for over a year. Unilever endured a rare sales volume dip, too. Procter & Gamble, in contrast, enjoyed its second straight quarter of volume-driven growth as the metric rose in each of its five main product categories, led by a 5% jump in the healthcare segment.

Costs are down

Costs continued to trend lower, thanks to management's multiyear effort to slice billions of dollars out of its expense structure. Cost of goods sold fell as a percentage of sales, which kept the company right on track to deliver its target of $2 billion of annual savings.

PG Cost of Goods Sold (TTM) data by YCharts.

Cutting against those gains was an uptick in advertising spending. Management has credited the increased marketing support for helping drive sales gains, and so the company is likely to continue trading higher organic growth for lower operating profits.

Still, the bottom line improved despite the flat revenue and higher advertising spend. P&G's net profit margin ticked up by nearly a full percentage point, to 16.4% of sales, despite the negative impact of currency swings. Over $1 billion of stock repurchases, meanwhile, helped power a 6% jump in per-share earnings.

Management's focus

Executives sounded pleased with P&G's performance. "Our first quarter results mark a good start to the fiscal year," CEO David Taylor said in a press release. "We delivered broad-based organic sales growth improvement across product categories and markets, as well as strong cost savings."

P&G's 10 core product categories. Image source: P&G investor presentation.

Management also highlighted its recent sale of beauty brands to Coty that marked the effective end of its two-year brand-shedding initiative. Now the company is targeting just 66 franchises (down from 165) that Taylor and his team believe have the best prospects for sales growth and profitability. "We are now focusing all our efforts on 10 large, structurally attractive categories where P&G holds leading positions," executives said.

Looking ahead

P&G still has plenty of work ahead before investors can call the turnaround a success, though. After all, the company left its full-year sales growth outlook unchanged at 2%, which implies that executives see a slowdown ahead over the next nine months.

However, this report provides the strongest evidence yet that P&G's growth trend is finally starting to improve. The company has now logged two straight quarters of sales volume gains, and market-share gains are evident in categories like healthcare, and fabric and home care. So it seems likely that P&G will soon return to the level of balanced growth that management has aimed for, but not achieved, in years.

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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.