Are Procter & Gamble Co.'s Growth Days Over?

By Demitrios Kalogeropoulos Markets Fool.com

It's been two steps forward, one step back for Procter & Gamble (NYSE: PG) investors so far this year. The consumer products giant posted consecutive solid quarters of growth to begin its fiscal 2017. In fact, the boost was strong enough that it convinced management to raise its operating outlook. But P&G in late April revealed a slowdown and warned that it would likely finish at the low end of its latest guidance.

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Below, we'll look at the prospects for this struggling business to return to market-beating sales gains.

Breaking down the slump

Organic growth fell to a 1% rate last quarter after rising by 2% in the prior quarter and by 3% at the start of the year. The drop was broad-based, with the core U.S. market seeing its growth rate cut in half from the prior quarter as developing markets slipped to a 4% increase from 5%.

A few negative industry trends contributed to the slump, including delayed tax returns and rising gas prices. As a result, P&G wasn't the only company to take an operating hit. Unilever (NYSE: UL) posted declining sales volumes in its fiscal first quarter and had to rely solely on price increases to boost revenue. And Colgate (NYSE: CL), which competes with P&G's Crest toothpaste brand, lowered its outlook after first-quarter results came in below management's target. "Uncertainty in global markets and slowing category growth worldwide remain challenging," executives said as they predicted underperforming their goal of between 4% and 7% organic growth this year.

Image source: Getty Images.

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Yet P&G also lost market share in some of its most important categories. The grooming business endured a double-digit sales drop in developed markets as the Gillette razor blade franchise struggled against intense competition including from Unilever's Dollar Shave Club. The brand has seen its market share dive to below 65% from 70% in fiscal 2013, and there aren't currently signs that a turnaround has taken hold.

Doubling down on what's working

On the bright side, P&G has now shed dozens of its weakest brands so that the remaining portfolio enjoys both above-average growth prospects and unusually high profitability. Those advantages are combining with huge cost cuts and efficiency gains to put the company in a great position to plow investments into supporting its key franchises with bigger marketing budgets.

It's early to expect major positive impacts from these changes, especially as the industry weakens further, but P&G did manage higher sales volume last quarter, which is more than rival Kimberly-Clarkcan claim. Among its other key wins was a 30% spike in e-commerce sales that pushed that segment to a respectable 5% of the overall business. Procter & Gamble's earnings are rising, too, allowing the company to return to a more respectable pace of dividend increases.

PG Net Income (TTM) data by YCharts.

A real growth upgrade -- one that delivers persistent market share gains -- won't happen until P&G ups its innovation game. The good news is that the company has in the recent past introduced products that both sped up the category and generated lasting profits. These include Tide pods and Downy scent beads. The franchises are driving industry-leading revenue and profitability growth more than five years from their introduction.

Unless P&G can launch a string of product hits like these in its baby care, fabric care, grooming, and healthcare segments, organic growth is likely to continue lagging the industry. Management says they're working on plenty of ideas with this kind of potential. If a few of the innovations succeed, the company can at least partly offset the weak industry conditions that CEO David Taylor and his team are projecting to seep into the 2018 fiscal year that begins in July.

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