EUR 850.00 For Business Accounts Only

Morningstar | Wide-moat P&G aims to stem the tide of past market share losses with an eye toward profit gains.

Following 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 grooming and baby care continue to languish (around one third of total sales), with each down 2%-3% on an organic basis in the fourth quarter. However, excluding these two segments, sales popped more than 3%, with beauty again the standout (one fifth of sales, up 7%). We think this showcases the first fruits of P&G’s efforts to rationalize its mix. And while improvement has yet to prove broad-based, we expect continued investments behind its core businesses will bolster consolidated sales growth and support its brand intangible asset.And despite slimming down, we still think P&G will carry clout with retailers, maintaining its scale edge. The 65 brands that remain in its portfolio include 21 that generate $1 billion-$10 billion in annual sales and another 11 that account for $500 million-$1 billion in sales each year. 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 accelerating top-line improvement at any cost, and surmise that 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. And while inflationary and promotional pressures are unlikely to subside near term (in line with commentary expressed by other consumer product manufacturers), we think its stringent focus on costs stand to modestly boost gross margins (up 190 basis points relative to the past five years on average to 51% by fiscal 2028) longer term, while also fueling 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.