US consumer goods giant Procter & Gamble Co. (P&G) reported its fiscal 2017/2018 first-quarter results, with sales slightly below analyst expectations but strong performance in China, where e-commerce sales grew 60% year-over-year. Executives revealed that P&G's annual e-commerce sales in China have exceeded $1 billion.

For the three months ended September 31, 2017, P&G's key financial metrics were as follows:

  • Net sales increased 1% year-over-year to $16.65 billion, below the analyst estimate of $16.69 billion.
  • Organic sales increased 1% year-over-year.
  • Net income increased 5% year-over-year to $2.85 billion.
  • Diluted net earnings per share increased 10% year-over-year to $1.06.
  • Core earnings per share increased 6% year-over-year to $1.09, beating the average analyst estimate by 1 cent.

Segment performance:

  • Beauty: Organic sales increased 5% year-over-year. Driven by growth in China, including accelerated growth of SK-II, skin and personal care organic sales grew at a double-digit rate; hair care organic sales grew at a low single-digit rate.
  • Grooming: Organic sales increased 6% year-over-year. A decline in shaving care sales was partially offset by growth in home appliances.
  • Health Care: Organic sales increased 1% year-over-year. Oral care organic sales grew at a low single-digit rate; personal health care organic sales declined at a low single-digit rate.
  • Fabric and Home Care: Organic sales increased 2% year-over-year, driven by growth in fabric care.
  • Baby, Feminine and Family Care: Organic sales decreased 1% year-over-year. Baby care organic sales declined at a mid-single-digit rate.

P&G CFO Jon Moeller said: "The quarter was somewhat challenging, with higher commodity costs and natural disasters impacting us, and transportation costs were also relatively high in many regions."

This quarter's results also serve as a strong rebuttal to activist investor Nelson Peltz, who holds a $3.5 billion stake in P&G and sought a board seat. Peltz had criticized P&G for underperformance, lagging the market, losing market share, and being overly bureaucratic. P&G stated that preliminary voting results on October 10 were insufficient to grant him a seat, but Peltz has not given up.

Razor manufacturers such as Unilever's Dollar Shave Club, Harry's, and Edgewell have taken some business from P&G (represented by Gillette). In response, P&G has cut prices by about 12% to remain competitive, but price cuts, poor product mix, and the Brazilian recession led to a double-digit decline in organic sales for shaving care.

RBC analyst Nik Modi said: "Grooming is in a trough." Stifel analyst Mark Astrachan noted that although P&G has made some adjustments (including price cuts), its product pricing remains too high compared to others.

China is a key focus for future growth

In the first quarter of fiscal 2018, P&G's sales in China, its second-largest global market, grew 8% organically year-over-year, with e-commerce sales surging 60%.

According to P&G China executives, P&G China's annual e-commerce sales have exceeded $1 billion.

In the quarter, Olay brand sales in China grew at a mid-single-digit rate, while SK-II brand sales surged 40% year-over-year. P&G expects China sales to grow at a mid-single-digit rate for the fiscal year. Moeller said that six of the seven product categories P&G sells in China improved in the quarter.

This turnaround is significant, as in fiscal 2016, P&G's sales in China declined 5% organically, mainly due to a gap in the diaper category.

Sumeet Vohra, P&G's Vice President of Hair Care for Greater China, noted that the region is the world's largest hair care market, with the global retail hair care market valued at $8 billion. Vohra said P&G's growth in the region this year will be at a mid-single-digit rate, emphasizing that four of China's top five hair care brands belong to P&G.

Despite a $100 million loss from hurricanes in the southern US, P&G maintained its fiscal 2018 outlook, expecting organic sales growth of 2-3% and core earnings per share growth of 5-7% year-over-year.

Appendix: Screenshot of P&G's official press release

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