3rd UPDATE: P&G 4Q Sales Drop As Consumers Trade Down
August 05 2009 - 2:13PM
Dow Jones News
Procter & Gamble Co.'s (PG) fiscal fourth-quarter profit
exceeded expectations, but the consumer products giant continued to
see sales declines across most of its businesses as consumers cut
back on purchases of its higher-priced products.
The consumer packaged goods giant projected further sales
declines for the coming quarter and said it will sell more
lower-priced products, a strategy the company has turned to in
recent months and one that marks some reversal from a prior
emphasis on pricier offerings with fatter profit margins.
In the latest fourth quarter, P&G was hurt by weaker sales
in its beauty and grooming businesses. Sales of the higher-end,
more discretionary line of Braun shavers fell sharply. But some of
P&G's everyday brands also continued to see declines as
consumers traded down to cheaper brands and private label goods in
grocery stores. Shipments of its key Tide brand, which is priced
much higher than competing detergents, fell during the fiscal
year.
P&G has raised prices steadily in tandem with higher
commodity costs and its strategy for some years has been to get
consumers to trade up to pricier consumer goods, but that strategy
has hurt the company during the recession.
In May, P&G told investors that it will put more emphasis on
affordable products and on brand offerings at different levels of
the price spectrum. Since then P&G has announced it is testing
a cheaper version of its well-known detergent, called Tide Basic,
that will cost roughly 20% less than the standard product. On
Wednesday's call, company executives said P&G is increasing
"the number of low-tier offerings."
P&G is essentially admitting "their price gaps got too wide
versus private label and other brands," says Jack Russo, an analyst
at Edward Jones. "The good news is because commodity and
advertising costs have come down they can go to more of a value
price strategy and not destroy margins too much."
Rival Colgate Palmolive Co. (CL) is perceived as having held up
better during the recession because its portfolio is focused on
low-priced staples like toothpaste and soap. Colgate shares are up
4.7% for the year, compared with a 13% drop for P&G.
P&G's results reflect the dilemma that consumer product
companies must now face after years of pushing customers toward
higher-margin offerings. Although there have been some signs of an
improving outlook for the economy, many consumer industry experts
worry that U.S. consumers will stay frugal even after the economy
bounces back.
Still, the consumer giant isn't doing a complete turnaround. The
fourth quarter was the first time the company reported earnings
under newly appointed Chief Executive Robert McDonald. He said one
of the company's key strategies will be to "grow, develop and
acquire faster-growth, higher-margin businesses." The company also
emphasized the potential it has to grow in areas like beauty.
P&G will aim to sell more beauty products in drug stores. It
is also aiming to increase its overall presence online. Emerging
markets are another key area of emphasis.
McDonald took over from A.G. Lafley, who engineered the giant
Gillette acquisition and drove the push toward faster-growing,
higher-margin businesses. But McDonald also inherits a host of
challenges as consumer trends shift and as the economic outlook
stays uncertain.
"Congratulations are premature," McDonald responded to one
analyst's comment. P&G shares were recently down 2.9% to
$53.88.
P&G said sales excluding acquisitions and divestitures would
be flat to down 3% in the first quarter. On a conference call,
company executives said results would improve sequentially after
the first quarter.
P&G is diversified globally, but emerging markets have seen
some slowdown as well and the company's international presence has
meant that it has been pressured by fluctuations in foreign
currencies.
For the first quarter, P&G projected results slightly more
downbeat than analysts - earnings of 95 cents a share to $1 and a
net sales drop of 7% to 10%. Analysts were looking for earnings of
$1 a share.
In the fourth quarter, earnings fell 18% on last year's sale of
Folger's, and the company saw volumes drop as it raised prices. For
the quarter ended June 30, the maker of such brands as Pampers
reported a profit of $2.47 billion, or 80 cents a share, down from
$3.02 billion, or 92 cents a share, a year earlier. Excluding such
items as divestitures and tax adjustments, earnings rose to 83
cents a share from 78 cents.
Net sales decreased 11% to $18.7 billion on the stronger U.S.
dollar, while organic sales - which exclude currency changes,
acquisitions and divestitures - fell 1%. Analysts polled by Thomson
Reuters most recently were looking for earnings of 79 cents on
sales of $19.32 billion.
-By Anjali Cordeiro, Dow Jones Newswires; 212-416-2200;
anjali.cordeiro@dowjones.com
(Tess Stynes contributed to this article.)