On Thursday morning, consumer staples giant Procter & Gamble (PG) released the firm's fiscal second quarter financial results.
For the three month period ended December 31st, Procter & Gamble posted GAAP EPS of $1.59 on revenue of $20.773B. While this performance was down from $1.66 on $20.953B for the year ago comps, the bottom line print did meet expectations, while the top line managed to beat Wall Street.
Unfavorable foreign exchange rates had a 6% negative impact on net sales.
Organic sales, which strips out the impacts of foreign exchange as well as acquisitions and divestitures, increased 5%. That's not quite as rosy as it sounds. The increase in organic sales was driven by a 10% increase from having raised prices and a 1% increase from a positive product mix. This was, unfortunately, offset to a significant degree by a 6% decrease in shipment volumes.
Wall Street had been looking for a less than 7% increase in prices and a roughly 2.6% decrease in volume.
For the period, P&G returned $4.2B of cash to shareholders via a rough $2.2B in the form of dividend payments and another $2B in the repurchase of common stock.
Segment Performance
Fabric & Home Care
- Net sales increased 1% from the year ago comp to $7.032B, driving $1.171B in net earnings, which was up 3% for a profit margin of 16.7%.
Baby, Feminine & Home Care
- Net sales dropped 1% from the year ago comp to $5.065B, driving $848M in net earnings, which was down 7% for a profit margin of 16.7%.
Beauty
- Net sales dropped 3% from the year ago comp to $3.807B, driving $911M in net earnings, which was down 4% for a profit margin of 23.9%.
Health Care
- Net sales increased 2% from the year ago comp to $3.051B, driving $686M in net earnings, which was down 2% for a profit margin of 22.5%.
Grooming
- Net sales dropped 9% from the year ago comp to $1.643B, driving $404M in net earnings, which was down 15% for a profit margin of 24.6%.
Procter & Gamble as a company drove net sales of $20.773B (-0.7%), driving net earnings of $3.959B (-7%). For the quarter, gross margin dropped to 47.5% from 49.1% a year ago, while operating margin dropped from 24.7% to 23%.
Guidance
For the full fiscal year, Procter & Gamble is increasing its guidance for all-in sales to a range spanning from -1% to flat from a range spanning from -3% to -1%. P&G is also increasing the lower bound of the firm's outlook for organic sales growth to a range spanning from +4% to +5% from a range spanning from +3% to +5%. Foreign exchange is expected to be a 5% negative headwind for the full year.
Procter maintained its prior outlook for full year EPS, which was a range spanning from flat from last year's $5.81 to up 4%, though the company added that given current conditions it continues to expect EPS results to land towards the lower end of that range.
Capital spending is expected to be about 5% of net sales, while the firm continues to shoot for adjusted free cash flow productivity of 90%. This would provide for the $15B or so that the firm expects to return to shareholders for the full year.
Fundies
Operating cash flow for the period was $3.574B. Less $708M in capital spending, the firm drove adjusted free cash flow of $2.866B. On earnings of $3.959B, that works out to an adjusted free cash flow productivity rate of 72%.
Moving to the balance sheet, the firm ended the quarter with a net cash position of $6.854B and inventories of $7.541B. These two line items were down 5% and up 8.9% over the past six months, respectively. This put current assets at $21.866B, which was in line with where it was six months back.
Current liabilities total $38.746B (not a misprint), including $14.3B in short-term debt. Yes, by my standards, the current ratio of 0.56 is pretty darned unacceptable. The fact that this ration is down from 0.65 six months ago means that this balance sheet is still moving in the wrong direction. Sans those inventories, the firm ended the quarter with a paltry quick ratio of 0.37, down from 0.45 six months ago.
Total assets amount to $117.715B including "goodwill" and other intangibles of $63.545B or almost 54% of total assets. You know we are not thrilled with that. Total liabilities less equity comes to $72.99B, including additional debt of $20.582B.
This is a really sloppy balance sheet, especially when one considers that the firm does drive significant free cash flow. I know it might hurt the share price, but has anyone at P&G considered buying back fewer shares or maybe not yielding 2.5%? I mean, that's what it will take to fix this mess. It is doable. It would require some gusto.
My Thoughts
I am somewhat disappointed. Not so much in earnings, nor in the ability to generate free cash flow. More so in the price increase/volumes shipped offset, as well as in the balance sheet. I came long small. I am up 6% on the trade, even with this morning's selloff, so I don't really have to do anything now. I knew the balance sheet had been wonky. I really had expected to see some headway in making improvements.
I had thought that PG could be a staple that I could keep on my book throughout the coming economic downturn. One would think that a seller of consumer necessities with loyal customers and a steady stream of free cash flow would fit that bill. I also liked that dividend. Now, I have to ask myself... Do I really want to own a large company trading at 25 times forward looking earnings that appears to be satisfied with a deteriorating balance sheet? Going into that downturn? I think not.
That means I'll be looking for a replacement for PG. Kimberly-Clark (KMB) is also expensive, also runs with a less than desirable balance sheet, but yields 3.5%. Then there's Campbell's Soup (CPB) . No, you can not get away from the lousy looking balance sheets by going there, but CPB does yield 2.8% and you can get into that name for 17 times forward looking earnings. Food for thought. As for PG... sold to you. Take badge 986.
