As competitors report encouraging growth in their personal-care portfolios, Procter & Gamble Co. CEO Bob McDonald admits that his firm has “work to do” on its offering from an innovation standpoint.

The CEO faced tough analyst questions during an April 27 third-quarter earnings call in which P&G reported sluggish growth in most of its business segments including beauty and grooming, which each recorded organic sales growth of 2% versus the prior-year period.

“It is my fault. I am the CEO of the company,” McDonald acknowledged. “We have talked about the headwinds we’re facing. We’ve talked about the steps we’re taking. We will deliver.”

P&G’s net sales inched up 1.5% to $20.19 billion for the January-March period. Even its best-performing segments, baby care and family care, which experienced 6% organic growth, fell short of analyst expectations.

More troubling was the 16.1% decline in net earnings to $2.41 billion, coupled with a drop in diluted net earnings per share to $0.82 from $0.96 in the year-ago period. P&G knocked down its full-year EPS guidance to $3.63 to $3.74, from a previous target of $3.85 to $4.08.

The Cincinnati firm is in the midst of a restructuring initiative to eliminate 5,700 non-manufacturing positions by the end of fiscal 2013 and shrink costs by $10 billion by October 2016 Also see "P&G Targets $10 Billion In Cost Savings In Four Years" - HBW Insight, 27 February, 2012..

Meanwhile, the firm is reshaping its corporate culture “to be much more focused on productivity on an ongoing basis,” McDonald said, maintaining that the plan is already beginning to work, with signs of progress in markets outside of the U.S. in particular.

But UBS analysts, already discouraged by P&G’s loss of market share across several categories, said the restructuring is likely to be a distraction and “have a negative impact on the company’s ability to execute … in the near-term.”

Ali Dibadj, an analyst with Sanford C. Bernstein & Co., pointed out that P&G’s stock has yet to reflect improvements from the restructuring, and bright spots in its performance pale in comparison to the competition, he suggested.

Specifically, Dibadj called out P&G’s beauty segment, contrasting it with Unilever PLC’s personal-care division, Johnson & Johnson’s skin-care business and Colgate-Palmolive Co.’s North American division, which all booked greater sales gains and “better profitability” in their most recent quarters, he said.

“So I’m just trying to understand how long you expect investors to wait” for similar results from P&G, the analyst remarked.

J&J’s skin-care sales in the U.S. rose 6.3% for the firm’s first quarter, announced April 17, driven by Neutrogena innovations including the brand’s Microdermabrasion System, a home-use device that delivers better results than comparable professional treatments, the company claims ([A#02120423009]).

At Colgate-Palmolive, new soap and underarm products helped North American sales advance 5% for the first quarter. Standouts were Softsoap Pampered Hands Jasmine Oasis and Vineyard Escape Scrub, Irish Spring Clear & Fresh Skin body wash and Speed Stick Power deodorants, Colgate said Also see "Colgate Posts 5% Growth In North America, But Remains Cautious" - HBW Insight, 30 April, 2012..

Unilever execs highlighted a number of the firm’s recent launches in hair care and skin cleansing during an April 26 first-quarter earnings call, in which the company reported an 11.9% increase in turnover compared with the prior-year period (see related story, p. 10).

Responding to Dibadj, P&G’s McDonald acknowledged being “unhappy with our innovation in beauty care,” which has underperformed “for some time now,” he said.

“It does take some time, but I think you’ll see sequential improvement quarter-to-quarter as we go forward,” the CEO added.

Improvement Needed In Mass

With middle-income households still struggling with high unemployment and low levels of disposable income, the mid-tier is where the battle is greatest for P&G.

The firm saw declines for the quarter in the hair-color business and in total hair-care volume in North America. However, Pantene shipments were up double digits in the region, credited to the launch of the brand’s Ice Shine and Aqua Light variants along with a refocused marketing campaign.

Skin-care volume in North America declined, which is an issue which P&G hopes to remedy with an upcoming launch of six new Olay anti-aging and cleansing products, plus a new selection of Pro-X starter kits.

In grooming, the firm saw a decline in sales volume in North America. Gillette got a boost from the January launch of the Fusion ProGlideProGlide Styler, a precision styling tool for men with facial hair ([A#02120123006]). However, the increase was offset by customer inventory adjustments and declines in the Gillette legacy and Mach3 businesses, according to Teri List, P&G senior VP and treasurer.

CFO Jon Moeller noted that Enegizer Holdings’ Schick Hydro razor has been promoted “at extremely high levels on a nearly continuous basis for the past two years,” increasing its percentage of volume moved on promotion by 50%.

Last year, Energizer predicted that Schick Hydro uptake and “measurably higher” promotional spending would contribute to appreciable sales gains in upcoming quarters Also see "Schick Hydro To Drive Double-Digit Growth For Energizer Personal Care" - HBW Insight, 7 February, 2011..

Energizer’s aggressive promotional efforts have resulted in rendering Hydro – which was introduced at retail in April 2010 for about $12 – competitive in price with P&G/Gillette’s Mach3, Moeller noted. On its website, Schick states: “Hydro shaves better than Mach3 and at a better price.”

While P&G enjoyed several years of consumers trading up to its products, “the bitter pill of lowering pricing and attacking lost market share” will be a tough one to swallow, Deutsche Bank analyst Bill Schmitz Jr. asserts in an April 29 report.

P&G also has lost oral-care share as commodity costs have compelled it to raise retail prices and competitors have not followed suit. Moeller said P&G is “facing an unprecedented level of promotional spending” by other players in the U.S. oral-care arena.

Colgate-Palmolive is one such company that has been “significantly stepping up promotional activity and sales” for Colgate and other brands in its product stable, according to an April 27 report from Morningstar. “We’re not surprised by this intensifying trend, so why is P&G’s management?” asks Morningstar’s COO of Equity Research Lauren DeSanto.

Emerging Markets More Optimistic

Developing markets are faring “much better’ than established ones, according to P&G’s Moeller.

Hair-care shipments in Brazil increased nearly 20% for the quarter, with double-digit volume growth on both Pantene and Head & Shoulders, while oral-care volume grew mid-teens in Latin America behind successful Oral-B toothpaste activity, P&G reported.

India hair-care shipments grew more than 50% on the strength of Pantene, driven by the brand’s sachets. In greater China, hair-care volume was up double digits, with Head & Shoulders volume increasing nearly 25% after a product restage and commercial innovation, according to the firm.

On the prestige front, SKII, a Japanese anti-aging skin-care line that includes Facial Treatment UV Protection ($170) and Whitening Source Derm Revival Mask ($160), surpassed $1 billion in annual sales in the third quarter, making it one of 26 billion-dollar brands in P&G’s portfolio.

P&G Promises Greater Innovation In Personal Care After Lackluster Q3

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