P&G's organic sales growth hit 5% to $22 billion, as it has for the past several quarters, with net earnings up 9% to $3.3 billion in its fiscal first quarter and earnings per share up 13% to $1.03, well ahead of consensus analyst expectations of 98 cents.
P&G also lowered the range for full-year earnings per share, but only by 3 cents, reassuring analysts who had feared worse fallout from a shaky global economy and strengthening dollar on P&G's bottom line.
Ad spending may have been slashed
But at least a few pennies of earnings per share for the largest advertiser in the U.S. and the world last quarter appear to come from deep cuts in U.S. ad spending. That was down 11.9% through the first two months of last quarter to $498 million (excluding outdoor in both periods, generally a minor P&G outlay), according to data from TNS Media Intelligence.
TNS data isn't yet available for September, but the cuts totaled $67 million for the first two months of the quarter and project to $100 million if sustained for the full quarter. The cuts extend, albeit not as deeply, a streak that began the previous quarter when P&G's TNS-measured spending plummeted 29%, or $250 million, to just over $600 million, according to a report last month by Goldman Sachs. That report said P&G's quarterly outlay in the calendar second quarter was its lowest since the first quarter of 2005.
TV appears to have borne the brunt of last quarter's cuts, as P&G's magazine spending (excluding Hispanic magazines) was up 2% for July and August and up 4.6% to $138.2 million for the full quarter, according to TNS data.
P&G doesn't break out ad spending by quarter, but its total outlay was $8.7 billion in the fiscal year ended June 30. The U.S. accounts for around 40% of P&G sales and more than half of its earnings. (A P&G spokesman declined to comment on ad spending for the quarter, reiterating that it's company policy not to disclose such data.)
In results released yesterday, the company said rising commodity costs had reduced its gross margin by 2.4 percentage points last quarter, which it partially offset through 1.8 points, or roughly $397 million, in reductions to sales, general and administrative expenses, which include advertising and a wide range of other costs.
Chairman-CEO A.G. Lafley and Chief Financial Officer Clayton Daley (who P&G announced yesterday will step down from that post Jan. 1) in a conference call didn't specify how much if any of those cuts came from advertising, though he pointed to the impact of such businesses as fabric care dramatically cutting back on "initiatives."
The spending cuts included "organizational, structural simplification [and] work processes that enable us to focus on the fewer things that deliver the most value," Mr. Lafley said. "In fabric care, for example, they've basically cut about 40% of the initiatives. ... They've focused on the larger-size initiatives and they've been generating a lot more incremental sales, profit and ultimate value."
A P&G spokesman couldn't immediately be reached for comment regarding how much of the savings came from media, though Mr. Daley in August indicated productivity savings this fiscal year would "relate to people, not to advertising spending."
"You should assume these productivity efforts are sustainable going forward," Treasurer Jon Moeller, who will replace Mr. Daley as CFO, said on today's conference call.
P&G's top-line growth last quarter fell short of several competitors that have reported so far, including Reckitt Benckiser, Alberto-Culver Co., Kimberly-Clark Corp. and the consumer business of Johnson & Johnson, which posted organic top-line growth of 6% to 10% last quarter, all of them helped substantially by commodity-fueled price hikes. But Mr. Daley said P&G's 5% rate was still better than the combined 3%-4% value growth in its markets globally.
Beauty products looking good
A bright spot was beauty, whose performance had been a company laggard for more than a year but which posted company-leading 6% organic growth last quarter behind strong global results for hair care, mid-teens growth for Cover Girl and double-digit growth for SK-II, which had struggled since a recall in China nearly two years ago.
Value brands were some of the real stars of the show for P&G last quarter. Luvs saw volume rise a whopping 30% last quarter as U.S. consumers traded down to the brand from Pampers. Gain and the value-priced Basic lines of Bounty and Charmin also saw double-digit growth, though P&G lost 2 share points in U.S. laundry detergents as price-conscious shoppers left Tide for private-label or other value brands.
Another star for P&G, the coffee business, with organic sales up 7%, is about to be spun off to the J.M. Smucker Co. within the next few weeks.
Organic sales in grooming, including the razor and blade business, were flat, ending a recent run of strong top-line results, as Gillette sales declined in North America overall and Braun sales fell by double digits globally due to an exit from the North American appliance business and falling sales of men's hair-removal products. Duracell also lost about a point of market share to 49% in North America as private-label batteries gained ground.
No price cuts yet
While P&G has seen about $300 million in relief in recent months from what had been a projected $3 billion in commodity cost hikes this year, that's not enough to start rolling back prices yet, Mr. Lafley said. "If commodities really move down in a meaningful way, we'll adjust our pricing," he said. "We've always done that. ... We just don't see it yet, OK? ... We're still looking at the toughest year in this company's history."
Countering that, he said, is stepped-up communication of value messages across multiple brands, including Gillette, Bounty and Luvs, which he described as "fairly hard-hitting, fairly comparative. ... Some of our businesses and brands were a little slow getting to that ... but we're getting there now, and you're going to see a lot of it from us."