What's Behind Procter & Gamble Co.'s Sales Growth Upgrade?

By Demitrios Kalogeropoulos Markets Fool.com

Image source: Getty Images.

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Procter & Gamble (NYSE: PG) shareholders received good news on the sales front recently as the company hiked its full-year outlook following two consecutive quarters of surprising gains.

Sure, the boost just pushed the growth target slightly higher than the 2% prior goal. Yet it marked the first time in over two years that P&G has increased its annual outlook. And if it meets the raised goal, the consumer goods titan will likely outpace rivals including Kimberly-Clark (NYSE: KMB) while ending its three-year long market share slide.

Better portfolio

The main contributor to the improving growth trend is P&G's new portfolio. It recently finished a brand-shedding initiative that removed 100 product lines, including several big brands like Duracell, from the business. When they started this process, executives said they wanted to simplify the operations by removing less-desirable franchises so that the remaining portfolio, led by global share leaders like Tide and Gillette, would be both easier to manage and more profitable.

Two quarters into fiscal 2017, and there's evidence the plan is working. Organic sales rose by roughly 2.5% over the last six months, putting the company ahead of its earlier target. "We said the new portfolio would grow up to 1 [percentage] point faster and over the first two quarters of this fiscal year, we're seeing this play out," Chief Financial Officer Jon Moeller explained to investors.

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BT = Before tax. Image source: P&G investor presentation.

Looking deeper into the metrics, investors can find more reasons why executives are gaining confidence in the sales trends. For example, P&G's organic growth was driven by higher volumes across each of its categories while pricing played just a small role. That result stood in contrast with Kimberly-Clark, whose Huggies diaper franchise competes against P&G's Pampers brand. Kimberly-Clark's volume gains slowed last quarter as management cited a "challenging economic and competitive environment."

Can P&G keep it up?

P&G is leaning on marketing and innovation improvements to keep the positive momentum going. On the innovation side, it's pushing a relentless pace of upgrades in brands like Tide Pods, whose premium category has quickly passed $2 billion in annual sales. A new version that includes Downy fabric softener is a good example of that process.

But while innovations can take a while to build up demand, marketing is another story. As the world's biggest advertiser, P&G knows how to spur consumer interest, and that's why it is dedicating a larger portion of sales to supporting its brands right now. Management is also aiming to keep that spending steadier than in the past so that sales growth within brands doesn't swing as wildly from quarter to quarter.

Some of the most encouraging progress on the marketing front has been P&G's sampling program that's getting millions of products, especially Pampers diapers, Gillette razor blades, and Tide detergents, into the hands of consumerswhen they most need them. The ramped-up program is in its early stages, but management is encouraged enough by the results that it is doubling down on it in hopes of creating loyal customers through targeted trial products.

Sales are weighted toward the second half of P&G's fiscal year, and so it's too early to say whether organic growth is really on a sustainable rebound. Moeller admitted as much last month, telling investors, "We still have a lot to prove [and] we still have a lot of work to do." Yet "so far," he continued, "it is progressing in the direction we had hoped."

In fact, if things continue at this pace, P&G will grow organic sales by as much as 3% this year as volume rises. That would mark a sharp improvement over 2016's 1% uptick that occurred amid falling sales volumes.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark. The Motley Fool has a disclosure policy.