Procter & Gamble (PG - commentary - Cramer's Take) reported EPS of 82 cents, a penny above consensus and up 11% from 74 cents last year. This was an excellent quarter under the circumstances, but was more or less expected given the U.S. share gains that were known during the quarter.
Total sales increased 9% on 4% volume growth. Organic volume was up 5%, overlooking the 1% drag from the European tissue divestiture. Currency added 5%. Price was a 1% factor, and disproportionate growth in developing countries had a 1% negative mix impact. By region, North America, Western Europe and developing country organic sales growth rates were, respectively, mid single digits, low single digits and low double digits.
The gross margin rose 9% and declined 30 basis points as a percentage of sales, to 51.3%, via higher energy and commodity costs. SG&A rose 6%, though advertising and promotion rose 9%. The SG&A percentage declined 0.8%, to 31.2%, allowing operating income to rise 13%. Higher divestiture gains last year and some interest expense increase brought the pretax income gain down to 6%. Net income rose 8% because of a lower tax rate in line with the rate expected for the year. There were 3% fewer shares outstanding.
Every business performed well with minimum mid-single-digit volume growth and good operating profit growth, except for Beauty, where sales rose 3%.
Outlook
Guidance for the next quarter calls for EPS between 76 cents and 78 cents vs. a Street estimate of 78 cents on 4% to 6% organic sales growth and a slight improvement in operating margins, basically a continuation of current trends. The fiscal 2008 EPS outlook was raised to $3.48 to $3.50 from $3.46 to $3.50. The Street estimate is $3.49. Some skeleton 2009 guidance was given: 4% to 6% organic sales, 3% to 5% organic volume, 1% price and 10% EPS growth. GAAP EPS should increase greater than 10% because of Folgers and tax impacts. Again, trends are not expected to change much.
Q&A
Everybody was looking for signs of pressure from consumers. Management did say, rightly, that paper is one of the first places that pressure shows, but the company is doing well there and the competitive intensity is less than in prior recessions.
Beauty has in the past slowed in its discretionary segments. Now, department store sales of high-end beauty products are under pressure. And category growth is temporarily being hurt by pricing (buy-one/get-one promotions, etc.). The company's high-end fragrances are not selling as well, but its Cover Girl cosmetic line is doing well at mass (probably a trade-down benefit). Pantene's latest reformulation is not allowing this 15 U.S. share product to grow, but with other products, Procter & Gamble is gaining shampoo share overall in the U.S.
Retail Saks Looks Priced for a Perfect Turnaround 4/30/2008 8:59 AM EDT But even if the company meets its own lofty goals, it's hard to see how the stock would perform well.
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