Procter & Gamble’s (PG, Financial) better-than-expected first quarter earnings must have been a huge relief for the company’s top management, which has been under severe pressure in the last few years as the company tried to adjust its brand portfolio.
The stock has been on a steady upward move since September of last year and is up by nearly 16% in the last 12 months.
One of the biggest achievements for the company last year was the improvement in margins. In fiscal 2016, Procter & Gamble’s efforts to adjust its brand portfolio resulted in an operating margin expansion of 190 basis points. First quarter operating margins this fiscal remained at the same level as it was during the first quarter of last year.
“Our first quarter results mark a good start to the fiscal year,” said Chairman, President and CEO David Taylor. “We delivered broad-based organic sales growth improvement across product categories and markets as well as strong cost savings. Earlier this month, we completed the last major step in P&G’s portfolio transformation with the Beauty Brands divestiture to Coty Inc. We are now focusing all our efforts on 10 large, structurally attractive categories where P&G holds leading positions.” – PG Press Release
With a major portion of the reorganization now complete and brand divestitures and headcount reductions on the wane, margins should stabilize around the 20% level the company recorded in fiscal 2016. Sales growth for the first quarter was flat while diluted net earnings per share increased by 5% compared to last year.
Though not groundbreaking by any measure, Procter & Gamble now expects organic sales for the year to grow at 2%, which should help restore its pride a little bit – pride that was deeply hurt after the company had to nearly freeze its dividend growth last year after the top line squeeze affected its cash flow position.
Procter & Gamble is not completely out of the woods yet; there is a lot the company has to prove. Its reorganization is complete; it has sold as much as it can and cut costs wherever possible. The margins indicate that it has a set of products that can give it better operating numbers, but now it has to prove that with this portfolio it can bring in sustainable growth.
Top line growth is the only way forward now that margins are at the right place for the long term. Two percent organic growth is a good start considering where it was before, but it will take several years for Procter & Gamble to once again become a growth company. The hope is that it will never get complacent ever again nor allow itself to be put in this situation in the future.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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