You know you're having a bad year when your management team has to spend months beating back an activist investor attack on your business strategy.
Procter & Gamble (NYSE: PG) narrowly won that particular battle in 2017. But the consumer products giant can't relax just yet. After all, the key shareholder complaints that fed the challenge -- and led to a shakeup on its board of directors -- are still present. Namely, P&G's stock trailed the broader market by a wide margin again last year thanks to a weak market share performance across its biggest product categories.
Growth was weak
Revenue growth started 2017 at an encouraging pace, with broad-based volume and pricing gains driving a 2% uptick in organic sales. That success led CEO David Taylor and his team to raise their full-year outlook in late January -- up to 2.5% from the prior 2% target. It also put the company ahead of competitor Kimberly Clark (NYSE: KMB), which was targeting 2% growth for the year.
The early results supported management's claim that the portfolio transformation strategy that removed 100 of its weaker brands over the past two years would pay dividends. "We said the new portfolio would grow [organic sales] up to one [percentage] point faster," Taylor said in a conference call with investors, "and over the first two quarters of this fiscal year, we're seeing that play out."
Yet things didn't look so encouraging by the end of P&G's 2017 year. In late August, the company revealed that market share slipped across each of its five core product categories, led by a 0.7% dip in the grooming unit. Its shave care business continued to struggle, with Gillette's global market share falling below 65% from 70% in 2014. P&G ended up boosting overall organic sales by just 2%, meaning the January hike to its outlook never materialized.
The consumer products giant notched some important wins during the year, too. Its growth pace, while lower than expected, held up in a slowing industry for branded consumer goods. Kimberly Clark saw its expansion rate fall to zero, compared to management's initial 2% target.
Unilever enjoyed heftier 4% gains but also noted weakening market conditions, especially in the U.S. geography. P&G's modest expansion wasn't so bad, given that tough selling environment.
Meanwhile, management's cost-cutting plan continued to deliver billions in savings that have kept P&G near the top of its industry in terms of profitability. And, if anything, the company's rock-solid financial efficiency only grew stronger in 2017. It converted over 100% of adjusted earnings into free cash flow, which helped fund a modest increase in the dividend growth rate.
Late in the year, P&G announced a compromise that gave Nelson Peltz a seat on the board of directors even though his activist challenge came up just short of the required shareholder vote threshold. Thus, management heard the message that investors want to see big changes from the company. "There is broad shareholder support for P&G's strategies," executives said in mid-December, but "at the same time, shareholders indicated that P&G needs to move faster to deliver improved results."
Those initiatives aren't likely to include a breakup of the consumer products titan or aggressive financial moves that load it up with new debt. However, with Peltz set to take his seat at the board in early March, investors have every reason to expect a shift in management's approach aimed at ending P&G's long-running market share slide.
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