EUR 850.00 For Business Accounts Only

Morningstar | P&G's Strategic Efforts to Hone Its Focus and Solidify Its Edge Beginning to Aid Sales and Profits

After Procter & Gamble's multiyear effort to cull around 100 brands from its mix (leaving it with 65), we think the firm is now poised to benefit from an enhanced focus on its core brands. We acknowledge that baby care has yet to show sustained improvement (around 25% of total sales), where underlying sales slipped 1% in the first quarter. However, excluding this segment, sales popped at a mid- to high-single-digit level across the rest of its operations, including grooming (around 10% of sales) which ticked up 4% after several years of lagging performance. We think this showcases the first fruits of P&G’s efforts to rationalize its mix. And we anticipate continued investments behind its core businesses will bolster consolidated sales growth and support its brand intangible asset.Even though it slimmed down, we still think P&G carries clout with retailers, maintaining its scale edge. The 65 brands in its mix include 21 that generate $1 billion-$10 billion in annual sales and another 11 that account for $500 million-$1 billion in annual sales. We believe with its vast resources to invest in its brands and by supplying products across multiple categories (including fabric care, baby care, feminine care, and grooming), trusted manufacturers like P&G are critical to both brick-and-mortar and e-commerce retailers.Further, we don’t believe P&G is anchored to boasting an accelerating top-line at any cost, and surmise efforts to drive efficiencies (targeting $10 billion, a high-teens percentage of costs) are prudent--aimed at reducing overhead, lowering material costs, and increasing manufacturing and marketing productivity. While inflationary and promotional pressures are unlikely to subside near term (in line with commentary expressed by other consumer product operators), we think its stringent focus on costs stand to modestly boost gross margins (up 140 basis points relative to the past five years on average to nearly 51% by fiscal 2028) longer term and fuel research and development (including improved packaging) and marketing. In this vein, we forecast the firm will allocate 3% of sales for R&D and 11% of sales for marketing each year over our explicit forecast.