Shoppers continue to pare back spending even on basic household staples, resulting in lower-than-expected sales for Procter & Gamble Co. and Colgate-Palmolive Co. The consumer-products giants are responding by raising prices to keep profits from plunging.
P&G; said that rather than splurge on premium-priced brands like its Tide detergent and Pampers diapers, consumers are choosing less-expensive versions, including its own Gain detergent and Luvs diapers. Some shoppers are forgoing discretionary purchases all together.
"There is some trade down, there’s obvious pocketbook pressure," P&G; Chief Executive A.G. Lafley said in a conference call Thursday. "Frankly, more consumers will try private-label brands and retailer brands than would try them in more normal economic times."
Kimberly-Clark Corp. last week reported lower sales of discretionary everyday basics such as paper towels and facial tissue.
To offset higher commodity prices and global currency swings, P&G; and Colgate raised prices in the quarter through March. P&G; said higher prices increased its total sales by 7%. Colgate raised prices by 8%.
Despite pressure from retailers to lower prices for cash-strapped shoppers, neither company conceded much willingness to do so.
Higher prices hurt sales volumes, especially in emerging markets, but still paid off for the companies.
"While painful, pricing to protect the structural economics of our business is the right thing to do," P&G; Chief Financial Officer Jon Moeller said.
“Structural economics”, new, more elegant word for profits! Bold moves to raise prices 7-8% in the current environment. Where is the competition to take advantage of this pricing vacuum? is there a Wal-Mart in consumer products manufacturing?
Analysts said higher prices could backfire. "Investors are certainly concerned by unit-volume trends, especially on the Procter side, and wondering whether they’re going to have to lower price points or kick up promotions," said Bill Pecoriello, CEO of ConsumerEdge Research LLC, a consumer-products research boutique in Stamford, Conn.
P&G; blamed lower sales on inventory cuts by retailers world-wide. Colgate said consumers still are pulling items from their cupboards before buying new items.
To keep consumers loyal to their brands, Colgate and P&G; are developing new and improved products and intend to ramp up ads that emphasize why their brands offer more value. Still, Colgate cut its first-quarter advertising spending by about 24%.
Beauty products were a particular blemish for P&G; last quarter, with the division’s sales falling 9% to $4.3 billion. Discretionary items were hardest hit, especially luxury fragrances and salon hair-care products.
Investors have said P&G; should stick to the household necessities it knows best. But Mr. Lafley defended the company’s emphasis on beauty, saying it is a "brand- and innovation-driven industry" that is shifting away from department stores to P&G;’s home turf.
"There are a lot of things that are dead right for us, and I don’t get too excited by a quarter or two, or even a year or two, if it is the right fit."
Mr. Lafley signaled a willingness to exit some of P&G;’s current categories and consider acquisitions, though he didn’t provide specifics.
He said there has been "significant interest" in acquiring P&G;’s pharmaceutical business, but the company is still weighing a variety of options for the operation.
P&G; reported net income of $2.61 billion, or 84 cents a share, for its fiscal third quarter, down 3.6% from $2.71 billion, or 82 cents a share, a year earlier. Revenue fell 8% to $18.42 billion.
Analysts polled by Thomson Financial forecast earnings of 80 cents a share on revenue of $18.9 billion.
P&G;’s organic sales, which exclude the impact of acquisitions, divestitures and foreign exchange, increased 1%, short of the company’s forecast gain of 2% to 5%.
P&G; cut the high end of its already-lowered outlook for the fiscal year that ends June 30. It now projects earning $4.20 to $4.25 a share, compared with its January forecast of $4.20 to $4.35 a share.
"The quality of results looks worse than expected and we expect questions about the sales outlook to remain," Goldman Sachs analyst Andrew Sawyer said in a research note.
At Colgate, first-quarter net income including noncontrolling interests rose 9.8% to $536.5 million, or 97 cents a share, from $488.5 million, or 86 cents a share. Revenue decreased 5.7% to $3.5 billion.
Beauty company Revlon Inc. posted first-quarter profit of $12.7 million, compared with a year-earlier loss of $2.5 million. Revenue fell 2.7% to $303.3 million.
The above from WSJ. Below from FT giving a different angle.
Every guru has their own particular recipe for success. But most agree that a good start towards a dream job, deal or love is a winning smile. Hence perhaps the continued resilience of Colgate-Palmolive, polisher of the world’s grins.
The maker of toothpaste and soap on Thursday reported first-quarter earnings which illustrate that point. While the strength of the dollar knocked overall sales – only a fifth of turnover is now taken at home – volumes were flat and profits higher than a year ago. Colgate achieved that through a combination of higher prices – for instance pushing through a rise of 16 per cent in Latin America, its largest market – and lower costs. Like fellow consumer goods heavyweight Procter & Gamble, also reporting results on Thursday, Colgate has been able to cut its advertising costs as the recession deepens.
However, while P&G; is struggling with consumers trading down, Colgate operates mainly in areas where private-label penetration is relatively low. Indeed, P&G; pointed to central and eastern Europe as among the hardest hit areas. Colgate, meanwhile, is taking toothpaste market share and increasing volumes in Russia.
In fact, the only real concern is the long-term effect of cutting advertising and promotion budgets. Investors should be wary of earnings today that come at the expense of future returns. Colgate maintains it will benefit from lower spending by competitors, greater on-shelf marketing and the fact that advertising dollars go much further this year thanks to the troubles of the media industry. But turning the screws now while competitors are struggling would be one way to raise future profits.
See Buyer’s Market in Advertising
Even so, Colga
te’s dividend yield, at 2.8 per cent, is at its most generous since 1993. The group trades with the market on just 14 times forward earnings, its lowest valuation since 1990. That should bring a smile to the face of any investor looking for value.
Related posts:
