Procter & Gamble Co. confuses analysts with new quest for 'irresistible superiority'

P&G's Q3 sales disappoint investors
Posted at 10:40 AM, Apr 26, 2017
and last updated 2017-04-26 15:08:30-04

CINCINNATI - The IRS, guys with beards and penny-pinching by the Saudi royal family were all blamed by Procter & Gamble Co. Wednesday as the company fell short of Wall Street expectations with third-quarter sales of $15.6 billion.

P&G also left analysts scratching their heads over its newest business strategy: A quest for “irresistible superiority.”

Analysts were predicting $15.7 billion in net sales for the Cincinnati-based maker of Tide detergent, Gillette razors and Pampers diapers. Profits increased 12 percent to $2.52 billion, or 96 cents per share. That was two cents better than analyst expectations.

P&G shares were down nearly 2 percent to $88.37 in early trading.

“There are probably more sources of volatility today than at any time in recent history,” said Chief Financial Officer Jon Moeller in a conference call with reporters. “We’re comfortable managing in this environment, but it does add volatility to our own results.”

Moeller said P&G profits would have increased 15 percent if not for foreign exchange fluctuations in Europe, Africa and Latin America. Saudi Arabian consumers -- which represent a top 15 market for P&G – decreased consumption his year because of government spending cuts.

“Government employees, who constitute a large percentage of the population, have had their income reduced significantly and government subsidies for energy … are being removed,” Moeller said. “So, they’re kind of stuck in that pincer.”

In the U.S., Moeller said fraud-reduction measures by the IRS delayed tax return checks by five weeks.

“If you’re a middle or lower-income consumer, that’s a big deal,” Moeller said. "We saw that reflected in consumption rates, in the month of January particularly, and February. In March, things got better.”

In P&G’s worst-performing business segment for the quarter, Moeller downplayed the impact of cheaper razors that took market share from Gillette’s premium-priced products in recent years.

Outside the U.S., “the business is in pretty good shape,” Moeller said. “So, most of the decline is in the U.S. and the majority of that is driven by the continued societal trend towards more facial hair. So, less shaving incidence.”

P&G’s grooming business reported a 6 percent decline in organic sales, which excludes the impact of foreign exchange, acquisitions and divestitures. In April, the company adopted price reductions of up to 20 percent to combat lower-priced competitors like the Dollar Shave Club. Moeller wouldn’t say what impact those price cuts are having on its razors business, but pointed to “sequential improvement” in the third quarter.

On a volume basis, he said, market share was down 3 percent in January, improving to less than 1 percent in February.

“In March, we were up almost a point. So, we’re reasonably comforted that the trend, combined with the price reduction that just occurred, will put us in a better place,” he said.

In a conference call with Wall Street analysts, Moeller introduced a new strategy in which the company will use innovation, market research and advertising to make its products “irresistibly superior” in the eyes of consumers. Analysts reacted with skepticism, questioning whether it will work in an environment in which consumers are rejecting premium brands.

“Consumers agree that Gillette is the best-performing product, but other things are more important,” said Citigroup analyst Wendy Nicholson.

“You’ve made a lot of incremental investment over the past year,” said UBS analyst Steve Powers. “When does all this investment ultimately result in a true advantage for P&G?”

Moeller said P&G is aiming for products that consumers see as superior at all price points, so it becomes the dominant player in every category in which it competes.

“If we gain a small amount of share of the market that's stable or declining, that's a small victory,” Moeller said. “A large victory is driving market growth and capturing a disproportionate amount of that growth and there's huge value creation in that.”