Proctor & Gamble (NYSE: PG) is a global consumer goods powerhouse with household name brands that have been around for decades, and the company's $66.4 billion in revenue over the trailing 12 months, ending March 31, fund a large marketing budget that drives higher demand for its products.
But there's one problem. All of that marketing and brand power hasn't translated to growing sales or earnings over the last decade. As a result, P&G stock is up only about 12% since 2008, while the S&P 500 Index has nearly doubled in value.
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Then there are two consumer trends that are slamming P&G. The grooming segment, which primarily focuses on shaving and includes well-known brand Gillette, is getting hit hard by price-conscious shoppers who have a wealth of new options. Then there's the growing organic personal care market, which P&G hasn't taken advantage of as it focuses on its legacy brands.
Mounting competition is taking a toll
Over the past few years, there have been an increasing amount of advertisements for new razor products and subscription services that can compete with Gillette. There are small upstarts like Harrys.com, and the Brett Favre-approved, as-seen-on TV, Tough Blade.There's even been a comeback of the single-edge razor -- which if successful will roll back decades of investment in innovation and marketing by Gillette telling the world that multiple blades are better than one.
The key sales pitch of these alternative shaving products is that they not only deliver a comparable shaving experience to those provided by major brands such as Gillette Fusion, but (most importantly) they will save you money. When we look at the numbers behind P&G's grooming segment -- which represents 10% of P&G's annual sales -- it becomes clear more customers are switching to these cheaper options.
Through the first three quarters of fiscal 2018, the grooming segment's net sales are down 1% (excluding acquisitions and divestitures). The reason for the decline is not volume growth (which was up 1% year over year), but pricing, which is down 3% -- a tell-tale sign that competition is forcing P&G to lower prices to maintain its volume growth. And those lower prices are hitting P&G where it hurts -- the bottom line -- with grooming's net earnings from continuing operations down 11% through the fiscal third quarter of 2018.
P&G's other segments -- beauty, healthcare, fabric, and baby care -- are doing somewhat better than grooming. Company wide, total net sales are up 3% through the first three quarters of fiscal 2018 (excluding acquisitions and divestitures). However, like grooming, this is mainly stemming from volume growth, as pricing is down 1% across the company's product lines.
P&G is missing a real growth opportunity
It's hard to complain about P&G's slow growth when it's consistent with the global personal care market overall, which InkWood Research forecasts to grow 2.81% through 2026. P&G could be doing better, however, when considering that the organic personal care market is growing 9.6% annually -- much faster than P&G's legacy brands.
P&G could tap into this growth trend by acquiring smaller, organic personal care brands, but the problem is management's strategy is built around its legacy brands. They're reducing, not expanding. P&G spent the last few years shedding 105 brands to focus on the company's biggest, most profitable brands. These moves didn't provide much improvement to P&G's top line growth with net sales (excluding acquisitions and divestitures) improving only a few percentage points since management started reducing its product roster.
In many cases, shedding brands to cut costs and invest more in the products with the best margins is the right move, but sometimes it's best to sacrifice near-term profitability in order to position the company for long-term growth. By largely ignoring the organic market, which has the best growth potential, P&G is missing an opportunity.
The reduction in brands achieved the intended objective on the bottom line with non-GAAP earnings per share expected to grow 6% to 8% in fiscal 2018, based on management's guidance. But earnings are also being boosted by management's ongoing share repurchases. You have to wonder if shareholders would be better off over the long-term if management used the $5.6 billion they have spent buying back stock to instead expand its product line to faster-growing organic and all-natural products.
Not buying management's strategy
Evidence is clear that P&G is losing the price battle, especially in its shaving business, and the company is not keeping up with consumer preferences for eco-friendly products. While the organic trend is sweeping across the consumer goods sector, P&G is doubling down on its legacy brands in an effort to grab higher margins.
P&G is facing a changing market and management doesn't seem to have the strategy to address the problem, and that's why it may be best to steer clear of the stock for now.
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