Cost savings boost profitability
Procter & Gamble (PG) has managed to report higher profitability despite waning sales. The company’s focus on cost and productivity measures have helped it generate higher margins, which in turn has helped its core EPS (earnings per share) to surpass analysts’ expectations for the past nine consecutive quarters.
Going forward, the company’s management expects 5.0%–7.0% improvement in its core EPS for fiscal 2018. Management anticipates higher cost savings and a lower outstanding share count to boost its bottom-line growth. However, higher commodity costs, an unfavorable mix, and product reinvestments are expected to remain a drag.
Procter & Gamble has been streamlining its operations and reducing overhead costs to generate higher profitability. The company plans to generate $10.0 billion in savings from cost-cutting and productivity initiatives over the next five years, which should help it fund its growth initiatives and boost profitability.
However, Trian Partners raises concern over the company’s cost management techniques and argues that PG’s efforts to reduce costs have not adequately resulted in creating value for shareholders. The hedge fund stated that PG claims that currency headwinds offset most of the company’s cost savings. Meanwhile, the portion that was reinvested in the business to drive growth has not resulted in accelerating sales and profitability.
Most of the company’s peers are also focusing on reducing costs to drive profitability. However, moderating sales growth and higher costs are expected to remain a drag. For instance, Colgate-Palmolive (CL) and Kimberly-Clark (KMB) lowered their EPS outlook for 2017 in the wake of a category slowdown and higher input costs.