Procter & Gamble Co.'s Worst Business Last Quarter
It's early yet for Procter & Gamble (NYSE: PG) shareholders to break out the champagne. Sure, the company just posted its fastest sales growth pace in years. And yes, profits spiked by double-digits as cost cuts flowed directly down to the bottom line.
However, P&G left its weak fiscal year guidance unchanged (projecting 2% organic growth compared to 4% for rival Unilever (NYSE: UL)), and executives warned investors to expect bumpy results ahead. "We still have work remaining to get our brands back to market levels of growth," management said.
One of the biggest challenges is in the baby care division, which was the consumer goods giant's worst-performing business segment last quarter:
|
Segment |
Organic Volume |
Organic Sales |
|---|---|---|
|
Beauty |
2% |
3% |
|
Grooming |
3% |
3% |
|
Health care |
5% |
7% |
|
Fabric and home care |
4% |
4% |
|
Baby, feminine, and family care |
4% |
2% |
Data source: Procter & Gamble.
The division is home to Pampers, the leading global diaper franchise and P&G's biggest single brand by far.
The company managed solid volume growth, but baby, feminine, and family care was the only segment that suffered from lower average prices. At 2%, it also brought down the company's overall organic sales growth pace. Most of that weakness was in the baby portion, where P&G lost market share in the diaper category.
What happened this quarter
Parts of the portfolio did well. Pampers, for one, grew at a faster pace than the overall market with help from innovations in the Cruisers product line.
Things weren't as encouraging on the value end of the market, though. The Luvs diapers brand lost share in North America and P&G was forced to lower prices in Europe due to rising competition from rivals including Kimberly-Clark's (NYSE: KMB) Huggies. P&G saw hefty declines while Kimberly-Clark's Huggies volume only fell slightly.
Regionally, baby care stumbled in China but Procter & Gamble managed growth in other emerging markets.The baby, feminine, and family care division lost half of a percentage point of market share last quarter compared to aflat resultfor fiscal 2016.
Struggles in the baby care segment might help explain why P&G kept its 2% growth forecast in place despite logging 3% improved sales in the fiscal first quarter. The company also warned that expenses will creep up as it spends heavily on marketing to support its brands.
Image source: P&G investor presentation.
Overall organic growth, meanwhile, should match or slightly exceed the volume figure, which will imply that P&G passed along slightly higher prices to customers and didn't need to resort to aggressive promotions to protect market share.
More work to do
P&G's hefty advertising budget will be critical in any turnaround plan, as will its trial program, which is the strongest in the industry (it works with hospitals to get Pampers samples to over 70% of new moms in the U.S. every year).
The good news for investors is that management is working hard to address the issue. "One business where we need to make much more progress is on baby care," Chief Financial Officer Jon Moeller told investors in a recent conference call as he revealed that sales shrank by double-digits.
A rebound is "not something that will happen overnight," Moeller warned, but will likely be driven by a string of innovative product launches like its recent premium taped diapers release.That's why organic growth will be key for investors to watch over the next few quarters. Ideally, volume will improve at a pace that's at least even with P&G's other divisions.
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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark 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.