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Why Procter & Gamble Is under Pressure from Activist Investors

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Part 2
Why Procter & Gamble Is under Pressure from Activist Investors PART 2 OF 5

Analyzing Procter & Gamble’s Sales

Struggling with sales

Procter & Gamble (PG) is struggling on the sales front. Moderating category growth in developed markets, including the United States (SPY) and the United Kingdom, lower pricing to beat the competition, brand divestitures, and currency headwinds are taking a toll on its top-line performance. Challenges in emerging economies, for instance, policy changes in India such as the rollout of the GST (Good and Services Tax), and demonetization and economic weakness in Brazil, Russia, Nigeria, and Argentina further restrict its top-line growth.

The company’s management remains confident that its fiscal 2018 organic sales will increase in the range of 2.0%–3.0%, mainly driven by innovation. Meanwhile, net sales are projected to rise 3.0% in fiscal 2018.

Analyzing Procter &amp; Gamble’s Sales

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However, in the near term, sales are likely to remain challenged as tough YoY (year-over-year) comparables, planned portfolio pruning, and a slowdown in the category growth rate could adversely impact its sales. Notably, the company is banking on innovation to drive its future revenues, which doesn’t seem to appeal to investors. Trian Partners pointed out that Procter & Gamble has struggled on the research and development front since there was no breakthrough product launched in the past several years.

Also, the company is losing ground in the grooming segment as online shave clubs, including Harry’s and Dollar Shave Club, are eating into its market share. To spur demand, the company slashed costs in the shave care category, which backfired and is hurting its margins. The chart shows the company’s deteriorating sales. However, note that most of this decline is due to the company’s planned divestiture of underperforming brands.

How peers are performing

In comparison, the company’s peers, including Clorox (CLX) and Church & Dwight (CHD), are performing strongly on the sales front. Their strong portfolio of value and premium brands backed by an innovation-led product pipeline and efficient marketing has helped these companies generate industry-leading sales growth.

Clorox expects its fiscal 2018 sales to improve in the range of 2.0%–4.0%, driven by higher pricing and new product launches. Moreover, the company is performing strongly in North America, which sets it apart from other consumer product companies. Church & Dwight expects its organic and net sales to rise more than 3.0% in fiscal 2017, reflecting new product launches in several categories.

However, similar to PG, Colgate-Palmolive (CL) and Kimberly-Clark (KMB) are also struggling to accelerate sales growth, in particular on their home turf. Given the tepid performance in the first half of 2017, Colgate-Palmolive’s management lowered its organic sales forecast and now expects 2017 organic sales to rise in the low single digits. Kimberly-Clark is also projected to report sluggish sales in the coming quarters, given the slowdown in developed markets.

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