Stock-shocked P&G slows intro of new products

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When Procter & Gamble Co. Chairman-CEO Durk Jager promised shareholders a less predictable company in October, the company's earnings surprise last week wasn't what he meant.

After several years of hitting earnings targets but missing sales goals, P&G did things the other way around this time, prompting the biggest one-day stock decline in the company's history. The 31% hit -- dropping shares to $60 on March 7, down from $118 in January -- was worse than the percentage loss P&G suffered during the Black Friday crash of October 29, 1929.

P&G closed at 53 3/8 on March 10.


Fueling the late-week drop were a warning from rival Dial Corp., which revised its earnings downward for the first half of 2000, and news reports of a class-action suit on behalf of shareholders accusing P&G of securities fraud. Such suits are a commonplace occurence whenever share prices drop sharply on earnings surprises or revised estimates from companies.

In the wake of the plunge, P&G is slowing down its aggressive new-product program, a move that will inevitably result in a sizable marketing cutback for lines whose launch now will be delayed. In July, Mr. Jager told analysts P&G would launch two dozen new brands or major brand extensions by the end of this year. But last week, he extended the timetable for the next dozen rollouts by as much as 15 months, saying the company plans 10 to 15 "in the next year or two."

In February, P&G had told analysts its fiscal third-quarter earnings would be up 7% to 9% but, in a stunning reversal last week, the company revised that to an 11% decline. While P&G didn't blame its earnings news on its brand offensive, some analysts did, citing the company's inability to deliver big enough or fast enough so far.

"We remain concerned that the market potential for many of P&G's new products is simply too small to justify the investment," Wendy Nicholson, an analyst with Salomon Smith Barney, wrote in a report last week. "We need to see more doubles and triples out of P&G's new-product activity as opposed to one home run (Febreze), several bunts and a single or two."


In her report, Ms. Nicholson added that "Olean, Dryel, Oil of Olay cosmetics and Pampers Rash Guard are all examples of products with very high launch costs that we believe have probably disappointed the company from a return-on-investment basis. We fear that Physique haircare and Fit fruit wash will end up in the same category."

But marketing spending will have to rise in order to allow P&G to better compete, said William Steele, analyst with Banc of America Securities.

Mr. Steele said overall the consumer package-goods industry will grow slower during the next five years than the past five, "and in order to grow your market share above trend, it's going to cost more" in marketing spending.

That fact, as much as anything else, may be what drove down stock of both P&G and its competitors even before last week's carnage.


For P&G's agencies, which in July will be paid a percentage of sales rather than commission on media placements -- last week's news had one silver lining. The company said it is on track for 7% to 8% growth not only for the fiscal year that ends June 30 but also next year -- double what P&G achieved in recent years.

But slowing new-brand introductions could hurt agencies, since sales will come later than originally planned.

In a conference call with analysts, Mr. Jager defended P&G's new-product efforts and its prospects, saying Febreze and Swiffer should each sell more than $400 million globally this year, while Dryel will sell more than $100 million.

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