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Procter & Gamble's surprisingly good results report vindicates CEO Bob McDonald's strategy for reclaiming market share lost to lower-cost rivals
In Bob McDonald's first full quarter at the helm of Procter & Gamble (PG), the world's largest consumer-goods company reported fiscal first-quarter results that were well ahead of expectations. After a spring and summer of poor results, as consumers switched from P&G's premium brands to lower-priced products, the company's price cuts and innovations showed signs of luring buyers back.
P&G, the maker of Tide and Gillette razors, on Oct. 29 reported earnings of $3.35 billion, a 1% slide from a year ago. Sales fell 6%, to $19.8 billion. But Wall Street had expected considerably weaker earnings, so company shares soared 4%, to $59.54. "The actions taken by Bob McDonald are now bearing fruit," said Sanford Bernstein analyst Ali Dibadj.
McDonald, who took over as chief executive from A.G. Lafley in July, has pledged to reclaim market share lost to lower-priced competitors and private-label brands. Under McDonald, P&G has cut prices across 10% of its portfolio and added less expensive alternatives to its premium diapers, razors, and toothpaste products. At the same time, P&G is pushing deeper into what McDonald calls "underserved" markets—from inner-city neighborhoods in the U.S. with large minority populations to emerging international markets such as the Middle East and Africa. "We are going to continue to expand more of our categories into more countries around the world," McDonald told investors on the quarterly conference call Thursday.
Raised growth outlook
Procter officials are confident enough in their plan that they increased the company's outlook for fiscal year organic sales growth to 2%-4%, from 1%-3% previously. Analysts were generally impressed with the company's forecast and its ability to grow while so many companies are finding growth only through aggressive cost-cutting. Joseph Altobello of Oppenheimer (OPY) maintained his outperform rating on P&G based on "confidence in P&G's ability to execute in a challenging environment, an improved cost structure that should provide significant operating leverage," he wrote in a report.
Make no mistake, though, Procter isn't "there's more work to do." Procter is a long way from reaching the kind of double-digit growth it has achieved historically. The Wall Street Journal (NWS) reported Thursday that McDonald is pressuring the heads of underperforming business units to find more growth, and cited sources close to the company saying he would divest weak businesses and snap up pieces from rivals such as Schering-Plough (SGP), Wyeth, and Alberto-Culver (ACV). A company spokesman had no comment on specific acquisitions or divestitures.
Whether or not an acquisition is near, a close look at P&G's margins shows that they might be peaking. Dibadj notes that Procter raised the bottom end of its guidance by 3¢, while suggesting that top-line growth is stronger than previously thought. He thinks this means that P&G expects its tactics of lowering price points, introducing lower-end products, and entering emerging markets will pressure margins, even as it drives revenue growth.
Procter CFO Jon Moeller said on"continuing volatility" in the marketplace remains an issue. McDonald added another perspective, saying P&G still has several products that continue to push margins upward, such as new anti-aging creams in the Olay line.
Another key point is that Procter's expansion into new markets is not necessarily a drag on profitability. McDonald pointed to the company's expansion of its diaper business into India. That business has grown 90% because P&G is competing against inferior products, in this case cloth diapers or areas where consumers have no source for diapers at all. There's not "some competitor that requires us to spend more money," McDonald said. "We don't have a margin goal, as such," he acknowledged. But, "we are focused on growth."