This year turned out to be the year when Procter & Gamble (PG, Financial) turned things around. The world’s largest consumer goods company went through a painful transition period which saw the company sell off many of its brand and tighten its portfolio of products. P&G understood that it had to shrink itself into a more efficient and lithe entity if it wanted to find a path to grow under the current market conditions, and it was in 2016 that all of those efforts started paying off for the company.
Net sales had been declining since 2013, reaching $65.299 billion in 2016, but margins significantly improved from 11.7% in 2015 to 15.4% in 2016, thanks to the company’s decision to whittle their portfolio to 65 brands in 10 business segments. This is down from more than 200 brands the company had at one point. P&G divested its battery business, sold several beauty brands to Coty Inc. and also got rid of its Pet Care business. The sharp trimming of brands was aimed at holding onto business lines that P&G thought had better growth prospects and provided better returns to the bottom line.
But the transition phase cannot go on forever. The company has divested whatever it can and has shaved off billions of dollars worth of sales in exchange for higher margins. The market has responded favorably to those moves, boosting the stock by nearly 10% in the last 12 months. With the transition now complete, P&G will have to return to growth for the stock rally to continue.
“We're maintaining our organic sales and core earnings per share outlook for this fiscal year. The first quarter was a good start, but comps get more difficult and we continue to face a relatively slow growth volatile world. We're expecting organic sales growth of around 2% for the year. This includes between 0.5 point and a point of headwind from the portfolio rationalization and strengthening work within the ongoing 10 product categories,” said Jon R. Moeller, CFO of Procter & Gamble, during the Q1 2017 earnings call.
During the first quarter of the current fiscal, P&G reported sales of $16.518 billion compared to $16.527 billion in the prior period - nearly flat growth. Organic sales grew by 3% during the quarter, thanks to 3% organic sales growth in the U.S., 2% in China and 2% in Russia. The U.K. was the only one of 10 markets where organic sales declined. Overall, this is great news for the company and a huge validation of their efforts at strategic amputations.
P&G now expects organic sales growth of 2% for the full year, with a net sales growth expectation of 1%. The next two quarterly results, especially the direction that organic sales takes in major markets around the world, will give us the clear signal that the transformation is over, and we can expect P&G to start its slow and steady progress towards top line growth.
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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