宝洁

Organic sales were flat in Procter & Gamble's fiscal fourth quarter, a marked slowdown from the 3% growth it posted in the fiscal third quarter. Adjusted operating margins slipped 130 basis points to 19.5% due to stepped-up brand investments.

Why it matters: To counter stagnant category growth rates amid an uncertain geopolitical landscape, we surmise P&G is astutely focused on funneling additional resources to enhance the performance and value proposition of its brand mix. While these efforts have yet to take hold in its largest market, North America (at around 50% of sales, down 1% in the quarter), P&G is again gaining share in China (which we estimate at a high-single-digit percentage of sales), with its 4% growth outpacing the market's 2% decline. We posit P&G is committed to this course, as we forecast that it will direct about 13% of sales (about $13 billion) annually to research, development, and marketing over the next 10 years.

The bottom line: Our $155 per share fair value estimate for wide-moat Procter & Gamble remains in place. After a 3% pullback in shares on the news, we think investors should keep an eye on this competitively advantaged name. We don't think the market appreciates the degree to which having product enhancements permeate throughout its price tiers stands to stifle competition, particularly from lower-priced private-label fare. Promotional levels throughout the industry have increased, but management's rhetoric suggests it is surgically discounting to drive trial of new products (versus pursuing a volume over value strategy), which strikes us as prudent to profitably grow its top line and support its stalwart edge.

Big picture: To fund brand support, we're encouraged that P&G is working to extract inefficiencies. As a part of this, the firm intends to rationalize its product set to remove complexity, though these moves are slated to dock sales growth by 30 basis points-50 basis points in fiscal 2027.

We're maintaining our $155 per share fair value estimate for P&G. Incorporated into its fiscal 2027 outlook (1%-3% organic sales growth and $6.89-$7.11 in adjusted earnings per share), P&G expects a $1 billion inflation headwind (primarily from oil-based derivatives). Even though most of its manufacturing is already close to the end consumer, we expect P&G to use multiple levers in the near term to mitigate this pressure, including identifying and eliminating inefficiencies, investing in margin-accretive innovations, and selectively raising prices. Against this backdrop, our long-term outlook remains for about 4% annual sales growth and nearly 25% operating margins at the end of our explicit forecast, up from an average of 23%-24% over the past five years. Our valuation implies a fiscal 2027 enterprise value/adjusted EBITDA of 15 times.

Despite gains over the past few years from consumers' penchant for cleaning and hygiene fare since covid, we had viewed the acceleration in P&G's top line throughout fiscal 2019 and into 2020 as a testament to the merits of its strategic agenda to rightsize its brand mix and drive productivity savings to fuel further investments behind consumer-valued innovation. Although we expect competitive pressures to persist amid challenging global macroeconomic conditions, we believe P&G is well positioned to weather this uncertain landscape. For one, since the last economic downturn (during which P&G chalked up low-single-digit quarterly organic top-line gains), the firm has prudently taken a more holistic approach to brand investing, encompassing how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers its retail partners and end consumers. Furthermore, management adjusted its mix about a decade ago to include more daily-use fare, pruning discretionary offerings—including its professional beauty brands.

While inflationary headwinds had been eating into margins and promotional intensity has stepped up in a few categories, we think management remains focused on unearthing efficiencies in its underlying business (reducing overhead, lowering material costs from product design and formulation efficiencies, and increasing manufacturing and marketing productivity) and investing to tout the prowess of its fare, which we view as prudent. We're encouraged by its intention to continue leaning into brand spending as an opportunity to showcase the value its products offer consumers, rather than preserving profits in this uncertain climate. This aligns with our forecast for P&G to allocate approximately 3% of sales to R&D and 10%-11% of sales to marketing over the long term.

We assign Procter & Gamble a wide economic moat rating based on its strong intangible assets, which have also enabled a cost advantage. P&G operates as a leading household and personal care manufacturer, with around a 35% share of the global laundry care category, almost 60% of the domestic menstrual care space, around 20% of dishwashing worldwide, and more than one-fifth of the North American men’s grooming market, according to Euromonitor. It has the resources to launch consumer-valued new products (spending 2%-3% of sales, or around $2 billion, on research and development annually) and market them (a low-double-digit percentage of sales, or $9 billion-$10 billion annually) to drive customer traffic into stores and onto e-commerce platforms. Even as the retail landscape has consolidated, which theoretically affords retailers greater bargaining power, leading brands like P&G's still drive traffic into retail outlets. Combined with its proven ability to keep retail shelves stocked, we believe P&G has solidified its position with retail partners, bolstering the advantage stemming from its intangible assets. Further, P&G has amassed significant scale, enabling lower unit costs than its smaller peers. This has manifested in returns on invested capital (including goodwill) that have averaged nearly 17% annually over the past 10 years, exceeding our 7% cost of capital estimate. We think the firm can continue to outearn its cost of capital for the next 20 years, supporting our wide moat rating.

In 2014, P&G began shedding about 100 brands—more than half of its brand portfolio at the time. We believed the firm would still have significant clout with retailers, given that the brands it was parting ways with had posted languishing sales and profits; its core brands already accounted for more than 85% of the firm’s top line and 95% of its profits. As such, we didn't anticipate P&G would sacrifice scale but would benefit from an enhanced focus (in terms of personnel and financial resources) and ultimately an improved share position.

The fruits of this initiative have been evident in the firm's adult incontinence business, where it now boasts a mid-teens share on its home turf, up from the low single digits in 2014 (at the expense of the industry leader, narrow-moat Kimberly-Clark, which lost around 10 share points over the same period). P&G reentered the aisle in July 2014, aiming to break down the stigma surrounding adult incontinence products by introducing new offerings under its Always brand. This included the launch of Always Discreet Boutique, which more closely resembled real underwear than other products at the time. According to the firm, this product drove a 50% acceleration in category growth after its launch and increased the firm’s household penetration by 15 points. Despite selling at a 60% premium to base category offerings, Always Discreet now boasts a dollar share in the low teens, up from around 10% before the launch of Boutique, according to management. We attribute these gains to P&G’s ability to align its mix more closely with consumers’ evolving preferences after narrowing its category reach.

In light of unrelenting competition, management has emphasized the need to launch superior products in terms of performance, packaging, brand messaging, in-store and online execution, and the value offered to both retail partners and the end consumer. Much of the discussion has centered on the need to be more agile—starting small with product launches and tailoring offerings based on consumer response before rolling out on a larger scale, which we view as a favorable shift from launching new products broadly (often with a delayed rollout) at the outset. Further, we're encouraged that P&G seems to appreciate the need to innovate across all price tiers (allowing it to trade consumers up and down within its brand set) to withstand intense competitive pressures, as the inability to do so has plagued its business in the past. We believe this blunts private-label encroachment. For instance, P&G has consistently held around 25% of the global laundry detergent space, far outpacing private label in the midsingle digits.

We’ve also seen pricing power manifest in the composition of P&G's organic sales growth. For one, price contributed 2.4% to top-line growth over 2018-22, while volume increased 2.3%. While volume slipped 3% in fiscal 2023 on the heels of a 10% price hike, we view this drawdown as muted, given the pronounced price increases. To further these efforts, P&G has been reviewing its suite of stock-keeping units to streamline shelf space (making it easier for consumers to shop) and reduce complexity (which should enhance service levels), with the goal of driving category growth. More recently, P&G said it is surgically rationalizing its product/geographic mix (including trimming its feminine care pad offering in Asia and exiting Bangladesh), optimizing its supply chain, and altering its organizational structure. We think these prudent efforts will yield additional cost savings that can be allocated to its core lineup to ensure its mix continues to resonate with consumers’ evolving preferences.

Thanks to its dominant brands and clout with retailers, P&G has unlocked a cost edge, with its wide-ranging scale affording negotiating power with suppliers. To assess the firm’s cost position, we’ve focused on direct operating costs related to manufacturing and distribution, while removing discretionary costs such as advertising and R&D, noncash costs including depreciation and amortization, and nonrecurring expenses to gauge which firms can best overcome customer acquisition costs. On this basis, P&G boasts a direct operating margin of around 40%, which outpaces the 35% average across our industry coverage.

P&G is again gaining share in China (which we estimate at a high-single-digit percentage of

sales), with its 4% growth in the fourth quarter outpacing the market's 2% decline. If share gains persist, sales could outpace our expectations.

Opportunities to rationalize its product mix could enable P&G to more effectively direct brand spending to the highest-return aisles.

Additional savings (which could stem from reduced overhead and higher returns on its manufacturing footprint and marketing investments) may materialize if efficiency is as ingrained in its culture as management suggests.

North America remains in the doldrums (its largest market at around 50% of sales, down 1% in the fourth quarter); competitive and macro headwinds on its home turf could eventually dilute its brand standing.

In fiscal 2027, P&G expects a $1 billion headwind from inflation (primarily from oil-based derivatives), which may dent profits if it can't extract efficiencies and/or raise prices.

Foreign-exchange volatility may hamper profits from time to time, as a portion of P&G's products are sold in different geographic regions.