Procter & Gamble, the consumer products giant targeted by activist investors, has raised alarm bells about its long-term profitability, reporting that its discounting strategy had squeezed margins during the most recent quarter.
P&G unveiled quarterly profits that beat forecasts, which chief executive David Taylor said would keep the world’s second-largest consumer group “on track to achieve our fiscal year objectives”.
Investors, however, focused on the company’s pricing power, wiping more than $4bn from the consumer giant’s stock value on Tuesday morning. Shares in P&G were down 2.7 per cent at $89.41.
After spending much of last year under siege by billionaire activist Nelson Peltz, P&G has been trying to reignite sales and fend off smaller competitors like Dollar Shave Club. P&G’s superbrands have been losing market share for a decade, while sales have dropped for the past three years — a key critique by Mr Peltz.
P&G has been cutting prices on core products such as Gillette razors to stoke sales. But this raised questions about profitability for the large consumer companies.
“The negative pricing in the quarter, coupled with talk of retailers cutting inventory, has made investors nervous about P&G, and the whole sector, too,” says Ali Dibadj, analyst with Bernstein.
This could put pressure on the rest of the [household and personal products] companies
The pain has been felt in one of P&G’s core products: razors. P&G’s total organic sales, which accounts for currency fluctuations, rose 2 per cent in the quarter, against analyst expectations of 1.9 per cent.
However “grooming” organic revenues fell 3 per cent in the quarter, weighed by declines in the “mid-single digits” in shaving care due to “pricing reductions” in the US. Total core gross margins across P&G fell 0.6 percentage points to 50.2 per cent in the quarter.
Core earnings climbed 10 per cent to $1.19 a share, beating consensus forecasts for $1.14, as net sales rose 3 per cent $17.4bn, which was in line with expectations.
“Our fieldwork suggests P&G stepped up promotional activity in the December quarter,” said Nik Modi from RBC. “This could put pressure on the rest of the [household and personal products] companies.”
Jon Moeller, P&G’s chief financial officer, looked to assuage analyst concerns about discounting as an industry-wide problem. “You’re absolutely right to point to this as a pain point,” he said on a call. However he added, “I don’t see pricing as having gone through a sea change that should reflect your view on the industry long term.”
Mr Moeller says that the discounts are working for razors. “The volume response to that pricing has been significant and right in line with what we’ve been expecting to see,” he told journalists on a call. “That’s all on track.”
Mr Modi predicts razor sales to “remain sluggish”. “Consumers are shaving less,” he wrote, due to telecommuting and an ageing population, which he predicts will also pressure sales at Dollar Shave Club and Harry’s this year.
In the three months since P&G last reported results, the company has succumbed to Mr Peltz’s pressure for a seat on the board. After a bitter proxy battle, the company initially announced it had fended off his campaign, but while the final tally showed Mr Peltz fell a few votes short, the margin was close enough that the company offered him a seat nonetheless. The 75-year-old will join in March.
Beauty products were a bright spot in the quarter, particularly in China, where the Olay skincare brand delivered 30 per cent sales growth. Mr Moeller pointed to the success of a new “super peptide formula” that “delivers visible skin transformation in 28 days”.
Organic sales of beauty products, including Olay, grew 9 per cent globally.
P&G tweaked its profit guidance higher in light of an expected windfall from the US tax reform. The maker of Tide detergent now forecasts core earnings per share to grow between 5 and 8 per cent for fiscal year 2017, from 5 to 7 per cent previously.