With Sales Sluggish, Price Hikes and Cost Cuts Drive Procter & Gamble Co Earnings

What happened with Procter & Gamble this quarter?Organic sales -- which exclude the impact of foreign exchange, acquisitions, and divestitures -- rose 1%, driven by price increases as organic shipment volume was unchanged from the year-ago quarter.However, foreign currency exchange rate movements reduced sales by 5 percentage points, with brand divestitures and the deconsolidation of the company's Venezuelan operations reducing sales by an additional 3 percentage points. That led to an overall year-over-year decline in net sales of 7% to $15.8 billion.

Procter & Gamble is facing intense competition in many of its markets such as grooming, where its popular Gillette brand is being pressured by lower-priced competitors here in the U.S. The company is also seeing growing opposition from local rivals in large international markets such as China. To combat these trends, P&G is ramping up its advertising spending to strengthen consumer awareness of the benefits of its brands.

In the meantime, price hikes and cost-cutting initiatives are helping to prop up profitability. "Core" (a non-GAAP measure that adjusts for restructuring and other non-recurring charges) gross and operating margins increased by 340 and 270 basis points, respectively, on a currency-neutral basis in the third quarter. That helped currency-neutral core earnings per share remain flat year-over-year at $0.89.

Cash flow and capital returnsImportantly, cash flow generation remains strong, with operating cash flow exceeding $3.2 billion and free cash flow surpassing $2.4 billion in the third quarter. That, along with the nearly $14 billion in cash investments on its balance sheet, allowed P&G to reward its investors with $1 billion in stock buybacks and $1.9 billion in dividend payments during the quarter.

Looking forwardProcter & Gamble reiterated its forecast for full-year organic sales to be "in-line to up low single digits" compared to fiscal 2015. Yet the company continues to expect its fiscal 2016 all-in sales to be "down high-single digits" from last year, primarily due to a negative impact 6 to 7 percentage points from foreign exchange.

The company also narrowed its projected range for core earnings per share to down 3% to 6% from its previous guidance of down 3% to 8% from 2015's $3.76. However, management lowered its guidance for constant currency core EPS growth to "mid-single digits" compared to its prior outlook of "mid-to-high single digits."

"We continue to make progress on the transformations we are undertaking to return P&G to balanced top and bottom-line growth and maintain strong cash generation," said CEO David Taylor in a press release. "We delivered another strong quarter of productivity improvement and cost savings, and we increased investments in innovation, advertising and selling to enhance our long-term prospects for faster, sustainable top-line growth and value creation."

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