The Procter & Gamble Company (NYSE: PG) Earnings Preview: Profit Falls In Q3

on April 26 2012 8:42 AM
Tide
Tide detergent, a Procter & Gamble (P&G) product, is displayed on a shelf at a store in Tempe, Arizona October 29, 2009. Reuters

The Procter & Gamble Company (NYSE: PG), the world's largest consumer-goods company, is expected to report lower profit when it unveils its fiscal third-quarter earnings before the market opens on Friday, hurt by higher commodities costs and a stronger dollar.  

The Procter & Gamble Company (NYSE: PG) has seen profit drop year-over-year in each of the last two quarters. The company said its profit fell by nearly half in the second quarter, reflecting higher commodity costs and a hefty write-down for acquisitions. This is after it reported a profit decline in the first quarter by 1.9 percent.

Even with declining profit, P&G was able to top analysts' estimates in the second quarter and match forecast in the first quarter, as Wall Street had relatively low expectations on P&G's performance.

In the third quarter, the Cincinnati, Ohio-based company is likely to book a lower profit of 93 cents a share on slightly higher revenue of $20.3 billion, based on the average estimate of analysts surveyed by Thomson Reuters. In the same period a year earlier, EPS was 96 cents on $20.23 billion in revenue. 

During the past three months, the consensus estimate has moved down from $1.06 a share to the current 93 cents, and remained unchanged over the past month.

P&G expects revenue to be in the range of flat to an increase of 2 percent from the year-ago level, with sales generated from existing operations to growth 3 percent to 5 percent on continued benefit from pricing.

Analysts will be watching how well customers are receiving the price increases. Core EPS should come in between 91 cents and 97 cents.

Meanwhile, higher costs for raw materials, including fuel, pulp and packaging, will continue to weigh on the third quarter results.

The company also slashed its earnings projections for the full year from its prior call of $4.15 a share to $4.33, to $4 to $4.10 a share.

We believe it is very unlikely that PG will raise FY12 EPS guidance, Linda Bolton Weiser, an analyst at Caris & Company, wrote in an April 13 research note.

During the quarter, P&G agreed to sell its Pringles business to Kellogg for $2.7 billion to focus on its non-food business. Starting from the third quarter, results of Pringles will be classified and reported as discontinued operations.

While Pringles was a revenue-driver for P&G, bringing in about $1.5 billion a year in sales, it was the company's only remaining food business and no longer fit in with P&G's strategy. In recent years, P&G also sold off its Folgers coffee business and Jif peanut butter.

Procter & Gamble competes with companies such as Colgate-Palmolive Company (NYSE: CL), Kimberly-Clark Corporation (NYSE: KMB) and The Clorox Company (NYSE: CLX).  

Stronger Dollar

The maker of products from Tide detergent to Gillette razors said foreign exchange will reduce net sales by 3 percent in the fiscal third quarter.

The stronger dollar has been hurting many U.S. companies that have large overseas businesses. When these companies report financial results, they need to convert sales from other currencies into dollars. Therefore, if the dollar strengthens relative to foreign currencies, the international revenue is converted into fewer dollars.

Consumer-product giants Kimberly-Clark Corporation (NYSE: KMB) and Colgate-Palmolive Company (NYSE: CL) also issued downbeat views in January due to the stronger dollar. Kimberly-Clark, which already reported first quarter results Friday, said changes in foreign currency rates decreased sales by one percent. Colgate-Palmolive is scheduled to report its first-quarter results before the market opens on Thursday, and expects foreign exchange to drag sales down by 2 percent. 

Restructuring Plans

Investors have long been frustrated by P&G's inability to operate more efficiently. Aimed at addressing this concern, the company outlined a plan at a February industry conference in Florida to lower costs by $10 billion by 2016, including reducing its non-manufacturing work force by 10 percent, or roughly 5,700 jobs, by June 2013.

We remain encouraged by Procter's cost cutting plans, JPMorgan Chase analyst John Faucher wrote in a March 12 note. However, Faucher pointed out that P&G's culture has not historically endorsed cost-cutting, which could pose as a risk for execution.

P&G Chief Executive Officer Bob McDonald expressed his determination to follow through on P&G's productivity initiatives.

We realize that we have to do it, McDonald said at the Consumer Analyst Group of New York conference. The environment necessitates it.

On Friday, investors will be looking for updates P&G offers about the restructuring plans.

This is something that's going to take four years to play out, said Morningstar analyst Lauren DeSanto. I would be surprised to see something very dramatic in results this quarter.

Emerging Markets

The company has been turning to emerging markets, which accounted for 35 percent of total revenue in 2011, for growth as sales remain sluggish in more mature markets such as Europe and the U.S.

A key element of our strategy is developing market expansion, McDonald said at the CAGNY conference in February.

Based on a study published by the Organization for Economic Cooperation and Development, the world's middle class will increase by over 1.4 billion consumers by 2020, with over 98 percent of these people living in developing markets.

P&G's sales volume in developing markets grew at high-single-digit rates, while developed regions, where the bulk of price increases were pushed out, declined by mid-single digits during the second quarter.

As an industry bellwether that appeals to a broad range of consumers globally, P&G's third-quarter performance could give investors a hint on consumer's tolerance for paying more for everyday household goods.

Stock performance

P&G announced a 7 percent increase in the quarterly dividend, bringing the company's quarterly payout to 56.2 cents a share and marking the 56th straight year P&G has raised its dividend.

Shares of The Procter & Gamble Company (NYSE: PG) rose 0.68 percent, to close at $66.89 a share, in Wednesday's trading. So far this year, the stock has appreciated 0.27 percent in value.