Procter & Gamble followed news that it was lowering guidance targets for the fourth quarter and full year 2013 with vows to launch “bigger” products, pursue a more balanced growth objective globally and still achieve $10 billion in savings by 2016.

“We are making necessary adjustments to our growth strategy to increase focus on our core business and to achieve more balanced growth across geographies, product categories and the top and bottom lines,” President and CEO Bob McDonald said in a June 20 statement.

Wall Street may not be reassured. Analysts are frustrated with the Cincinnati-based marketer for not better defending against macroeconomic challenges and fixing internal structural issues.

“We are placing the shares under review and intend to take a much more cautious stance on the firm's prospects over the next few years.”

– Morningstar’s R.J. Hottovy

On June 20, when P&G issued its revised guidance at the Deutsche Bank Consumer Conference in Paris, the firm's stock dipped 3% to close at $60.39.

During the conference, McDonald explained that the company's results in the April-June quarter would be hampered by slower-than-expected market growth rates, softness in developed regions and negative impacts from foreign exchange rate fluctuations.

The marketer of brands including Crest toothpastes, Pantene hair products and Vicks cough/cold remedies, now expects fourth-quarter organic sales growth of 2% to 3%, compared with earlier projections of 4% to 5%.

Net sales, dragged down by foreign exchange, are anticipated to fall 1%-2%, not increase 1%-2% as previously forecasted. Core earnings per share are expected to be in the range of 75 cents to 79 cents, compared with the previous target of 79 cents to 85 cents.

For full fiscal 2013, P&G anticipates that foreign exchange will negatively impact EPS growth by approximately four percentage points. Excluding foreign exchange effects, P&G's core EPS outlook would be in the range of mid- to high-single-digit growth, the firm notes in its release.

“We'll be working hard to reverse the current negative trend as quickly as possible, but it will take some time,” McDonald said. “And we want to be realistic and transparent about the potential pace of improvement.”

Bigger, Category-Creating Innovation

To right the ship, P&G is committed to driving the innovation of products, improving productivity and achieving cost savings at an “accelerated” pace. The company still aims to realize $10 billion in cost savings by the end of fiscal 2016.

Announced in February, the cost savings will come partly from the firm's plan to eliminate approximately 5,700 non-manufacturing jobs by the end of fiscal 2013 ([A#05120227014]).

P&G completed a “sufficiency evaluation” for its businesses to ensure that each has the right portfolio, innovation, pricing and marketing support levels, McDonald said.

As innovation is the “lifeblood” of the company, McDonald recognizes that product ideas need to be bigger and more “discontinuous,” which he defines as innovation that “disrupts a category or creates a new one.”

“We will work to bring new discontinuous innovations to market as fast as possible. It'll take some time,” he said.

The exec noted that with a focus on bigger innovations comes the need to scale back on smaller projects in the R&D pipeline.

P&G has reduced the overall number of products in its pipeline by 33% and increased the average size – in terms of sales – by nearly 50%, McDonald said. The firm has also established a new Business Creation Group to lead the charge on creating “wholly new categories within our channels.”

Early products emerging from the new innovation focus include Crest 3D White Glamorous White Toothpaste and Whitestrips and Crest Pro-Health Clinical Plaque Control, both launched earlier this year Also see "New Products In Brief" - Pink Sheet, 7 March, 2011..

The company also recently introduced Gillette FusionProGlide Styler, which has captured 20% of the razor category in the U.S. after just three months on the market, McDonald said.

The firm entered its newest category – sleep aids – with the introduction of ZzzQuil, under the Vicks brand, announced June 18 ([A#29120619003]).

On the prestige end, P&G is preparing a “full portfolio of new product launches.” Following on the heels of Gucci Flora Garden, fragrances launching this summer include Escada Delicate Notes, Hugo Boss Nuit for Women and James Bond 007. In September, Dolce & Gabbana Pour Homme and Pour Femme will roll out to 18,000 stores globally.

“Win Where It Matters”

McDonald cited slowing growth in China and continued challenges in the U.S. and Europe as factors in the firm's inability to meet growth targets. The executive reiterated that the company will not back off of its emerging market growth strategy, but will be more deliberate about how it grows in those markets.

He noted the firm has developed a “more focused” approach across its 40 largest and most important markets, its 20 largest innovations and its 10 most important developing market businesses to “ensure we win where it matters most.”

Partly in response to high commodity costs, P&G raised prices across its portfolio throughout this year. McDonald acknowledged that pricing in some areas has been too high, but that doesn't mean the company will roll back prices across the board.

P&G has taken about $3.5 billion in pricing increases this fiscal year; it plans to reduce that by only $200 million in six category/country combinations. Rather than a broad price cut, the firm says it will improve its communication to customers on the “performance of our brands and our products,” he said.

Analysts Take Cautious Stance

Analysts were disappointed by P&G's guidance adjustment. Morningstar analyst R.J. Hottovy asserted in a June 20 report that the firm should have done a better job anticipating current headwinds.

“We'd hoped that management would be better able to anticipate and defend against these macro challenges, which does not appear to be the case,” he said.

“We've been saying that management cannot afford to fall short of its promises and the clock is ticking on its turnaround, and because it now seems that the realization of any improvement from these efforts is farther off than we previously anticipated, we are placing the shares under review and intend to take a much more cautious stance on the firm's prospects over the next few years,” Hottovy said.

In a same-day analyst report, UBS' Nik Modi said the investment company has put P&G on its “watch” list and “remains on the P&G sidelines” for now. “Given P&G's track record of poor execution, we are willing to sacrifice a few points of upside to make sure P&G can deliver meaningful and consistent alpha to investors over a multi-year period,” Modi said of his “neutral” rating and $66 valuation of the stock.

P&G Slashes Guidance, Promises Sharper Focus, Bigger Innovations

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