Procter & Gamble Gets Slammed After Earnings Warning

Updated from 10:31 a.m. EST

Procter & Gamble (PG) warned investors Tuesday that it would not meet its sales and earnings projections for its third fiscal quarter and full year, despite its reorganization plan that has been a mantra for efficiency and sales growth.

Wall Street reacted with a vengeance, sending P&G's stock down 26 15/16, or 31%, to close at 60 1/2.

"We are not happy to have to take our numbers down. We've had a track record of meeting our bottom-line commitments," Durk Jager, P&G's chief executive, said in a conference call with investors Tuesday morning. "We will not disappoint you again."

He added, "We have learned that we simply can't focus on the top line to make the bottom line grow. It takes more."

P&G, the maker of Tide, Crest, and Pringles, said it expected third-quarter earnings growth to be 10% to 11% below the year-earlier quarter, an about face from earlier guidance of a 7% to 9% increase. That would make earnings for the quarter around 65 cents a share, compared with a consensus expectation of 78 cents from analysts polled by First Call/Thomson Financial.

The Cincinnati-based company also cut its anticipated earnings growth for the full year to 7%, or about $3.04 a share, from 13%, or $3.22 a share.

"We are getting more innovations to market faster because of our Organization 2005 structure and culture changes," P&G's chief executive, Durk Jager, said in a statement. "Nonetheless, I am deeply disappointed we have not made more progress in driving profit growth."

Jager attributed the shortfall to higher-than-anticipated pulp and petroleum-based raw materials, higher manufacturing costs in Europe, the delay of the U.S. approval of its osteoporosis drug Actonel and pricing competition in South America.

Organization 2005 is an initiative the company started last year to speed growth by creating more products and getting them quickly to market. Its goal is to increase long-term sales growth by 6% to 8% annually and increase net profit by 13% to 15% over five years.

But analysts in the conference call were still skeptical about the lingering nature of these problems. Procter & Gamble executives fired back, saying that the company had 50 new products in development and that sales of current items Febreez, Dryel and Swiffer dry mop would help clean up the near-term problems.

"We intend to take guidance down only once," said Clayton Daly Jr., P&G's chief financial officer.

"They were realistic in the conference call, but I think it's going to take them a little while to re-establish themselves with the Street," said Sally Dessloch, an analyst at JP Morgan who rates the stock a long-term buy. Morgan's underwriting relationship with Procter & Gamble was unknown.

Analysts and investors fear that these Procter & Gamble problems may be endemic to the world of consumer products. Merrill Lynch, for example, downgraded the entire cosmetics/household products sector. Analyst Heather Hay told her clients that P&G's announcement "carries broader fundamental implications for the group, which will likely keep interest in the sector, and therefore group valuation, muted for the foreseeable future."

That sentiment resonated throughout the major companies within the sector. Clorox (CLX) fell 3 13/16, or 9.5%, to close at 38 1/2. And Colgate-Palmolive (CL) dropped 6 1/16, or 11.5%, to 46, even though the company issued a statement Tuesday saying that it was on track for an excellent first quarter.

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