Shares of consumer packaged goods giant Procter & Gamble
(PG 94.12, +3.68, +4.07%) move to near six-week highs on Wednesday after the company beat
market expectations in Q2 and raised certain metrics for its fiscal year 2019
guidance in the face of an underwhelming outlook from a close competitor.
Simply put, PG reported Q2 earnings per share of $1.25, an increase of 5% year/year. Contributing to earnings improvements were a lower tax rate, resulting from the implementation of the U.S. Tax Act, and a reduction in the number of shares outstanding. Currency-neutral core earnings per share increased 13% for the quarter.
Net sales for the period were mostly flat at $17.44 bln as sales growth in the Beauty and Fabric & Home Care categories was offset by weakness in the Grooming, Health Care, and Baby, Feminine & Family Care segments. Excluding the impacts of foreign exchange, acquisitions, and divestitures, organic sales increased by 4%. Each of pricing and positive mix impact contributed a 1% help to organic sales, the latter due to disproportionate growth in the company’s premium Skin Care category behind the SK-II brand and strong growth in developed markets.
- In the Beauty segment, organic sales increased 8% in comparison to the prior year. Skin and Personal Care organic sales increased by double digits due to premium innovation, positive product mix from the growth of super-premium brands -- including SK-II, as mentioned above, and Olay Skin Care products --and increased pricing. Increased pricing helped to boost organic sales in the Hair Care category by low single digits.
- Fabric & Home Care segment organic sales increased 6% during the quarter. Fabric Care organic sales increased high-single digits. This category also credits improvement in premium products' sales growth, as well as innovation and pricing measures, for growth. Home Care organic sales increased by low single digits, driven by innovation and increases in merchandising activities and pricing.
- Grooming segment organic sales decreased by 3%. Following devaluation-driven price increases, volatility in quarter to quarter merchandising events, and heightened competitive activity, Shave Care organic sales decreased mid-single digits due to volume declines. Appliances organic sales were, meanwhile, unchanged.
- Health Care segment organic sales increased 5%. Oral Care organic sales increased by mid-single digits due to premium innovation, and Personal Health Care organic sales increased mid-single digits due to innovation and increased pricing.
- In the Baby, Feminine & Family Care segment, organic sales increased 3% versus the year ago period. Baby Care organic sales were unchanged due to offsetting impacts. Increased pricing and positive mix due to the disproportionate growth of premium products were offset by competitive activity and volume reductions following increased pricing. Feminine Care organic sales increased by high single digits, bolstered by innovation and product mix, particularly from premium products. Family Care organic sales increased by mid-single digits due to innovation, increased distribution, and increased pricing, partially offset by negative mix due to disproportionate growth of large sizes.
Reported gross margins were down 100 basis points, including
a 20 basis point impact from higher non-core restructuring charges versus the
prior year. Core gross margin decreased 80 basis points, including 60 basis
points of negative foreign exchange impacts.
In terms of guidance, PG didn’t disappoint, increasing the high end of its guidance for organic sales growth by 1%. Organic sales growth is now estimated in the range of 2-4% for fiscal 2019. The company now estimates that fiscal 2019 all-in sales growth will arrive in the range of down 1% to up 1% versus previous guidance for slates that are flat to down 2%. The company noted the net effect of acquisitions and divestitures should have a modest positive impact on all-in sales growth. Management also maintained its expectation for core EPS growth of 3-8% (implying about $4.35-4.56), including an estimated $1.4 bln headwind from foreign exchange and higher commodity and transportation costs.
What’s more, it appears that PG is defying gravity, as despite increased competition and higher transport costs, the company is managing to stay ahead. Management also quashed the issue that’s been plaguing some in Asia, and that’s a slowdown in China. On the conference call, management highlighted that PG hasn’t seen a sign at this point of slowdown of the consumer in China, evidenced by PG’s “strong first half and a second quarter in China.”
It appears from the rhetoric out of management that PG isn’t seeing the same issues as Kleenex owner Kimberly-Clark (KMB 112.03, -3.20, -2.78%), which this morning gave worse than expected fiscal 2019 guidance and underwhelming earnings for its fourth quarter amid a "challenging macro environment.”
PG’s gains have softened somewhat into the afternoon, now up just over 4% vs 6.60% at today’s highs.