NEW YORK, N.Y. – Procter & Gamble’s turnaround is still a work in progress.
The world’s largest consumer product maker said Wednesday that its third-quarter net income rose 6 per cent, helped by cost cuts and improvement in North America.
But P&G’s fourth-quarter outlook came in short of Wall Street’s expectations thanks to a mixed response to its new product introductions and what the company called “choppy” market conditions that led to modest revenue gains.
Shares of the Cincinnati-based company, which makes products ranging from Tide detergent to Crest toothpaste, fell 5 per cent on the weak outlook to trade around $77.75. The stock had been up 22 per cent since the beginning of the year.
P&G is in the midst of a turnaround plan introduced in February 2012 to try to regain market share that it lost during its aggressive bid to grow in emerging markets such as China and India where P&G gets about 40 per cent of its revenue. The company’s operations suffered during the expansion, which hurt sales.
The company’s plan focuses on its 20 biggest new products, such as Tide Pods liquid detergent capsules, and its 10 most-profitable emerging markets. P&G also has been implementing a major cost cutting effort aimed at saving $10 billion by 2016. Additionally, the company is focusing on introducing new products
The moves have been paying off — in some areas. P&G said it held or gained market share in categories representing more than 50 per cent of its sales globally and two-thirds of its sales in the U.S. during the quarter.
P&G’s net income for the third quarter rose to $2.57 billion, or 88 cents per share. That compares with net income of $2.41 billion, or 82 cents per share last year.
Excluding restructuring charges and related to the devaluation of the Venezuelan currency, earnings totalled 99 cents per share. Analysts expected 96 cents, according to FactSet.
“Strong cost savings enabled us to exceed our outlook on the bottom line,” CEO Bob McDonald said in a statement.
But overall top-line growth has been modest as the company has been dealing with a down European economy, slowing growth in China and some weakness product categories, such as skin care and makeup in U.S. and laundry detergent in Russia.
Revenue rose 2 per cent to $20.6 billion, falling short of analysts’ expectations of $20.72 billion.
Beauty segment volume, which includes products like Pantene shampoo and Oil of Olay, fell 1 per cent, hurt by heavy competition. Grooming segment volume, including Gillette and Venus razors, fell 2 per cent as strength in blades and razors was offset by lower sales of electric shavers and other appliances.
There were some bright spots, though. Health care volume grew 5 per cent as the company rolled out oral care products in emerging markets and a stronger cold and flu season compared with last year. And fabric care and home care volume rose 3 per cent, helped by growth of Tide Pods.
In coming quarters, P&G said it expects to reap the benefit of the new product launches, as it overcomes prior production problems for products like Tide Pods and steps up advertising and marketing initiatives.
On a call with analysts on Wednesday, CFO Jon Moeller called out five of P&G’s recent product launches that the company expects will drive growth in coming quarters. They include Tide Pods, which is expanding into Mexico, Brazil and Europe; Gillette sensitive skin razors; Braun Cool Tech dry electric razors; a relaunch of Proactive Health dry dog and cat food lines and the new Pantene Expert hair care line.
Reception has been mixed so far. For instance, Tide Pods is quickly gaining share. But Pantene Expert weaker due in part to L’Oreal launching its own new hair care line at the same time.
Going forward, P&G is ramping up advertising, adding in-store displays and making trial-size products to help get the word out on new products.
P&G spends more on marketing than any other company, according to Kantar Media. And advertising will be key, said Morningstar analyst Erin Lash.
“We think a heavy dose of reinvestment in marketing is what’s needed to reignite the business,” she said. “Even good new products can fail if consumers don’t know about them.”
Going forward, the company said it expects fourth-quarter net income of 69 cents to 77 cents per share, excluding one-time items. That’s below the 82 cents per share analysts expect.
For the year, P&G raised the low end of its guidance by 2 cents and now expects net income of $3.96 to $4.04 per share. Analysts expect $4.37 per share.
Citi Investment Research analyst Wendy Nicholson said analyst estimates for the fourth quarter were too high and advised investors to “focus on the fact that P&G is in fact actually delivering at the higher end of its guidance, which given where we have been in recent years with this stock, is a big improvement.” She kept her “Buy” rating on the company.