P&G annual profit drops 40%, sales disappoint

Procter & Gamble reported a $7 billion profit for its fiscal year ended June 30 – a 40 percent drop from the same period a year ago.

Sales decreased 5 percent to $76.3 billion – missing Wall Street forecasts. Closely-watched organic sales, which exclude impacts from foreign exchange, acquisitions or divestitures, increased 1 percent.

The Cincinnati-based consumer products giant said results were marred by foreign exchange rates, which shaved total sales by 6 percent. The company also took a $2.1 billion charge as it changed its method for accounting for Venezuelan operations.

P&G's sales results missed Wall Street expectations, but core earnings per share was $4.02, above forecasts of $3.97.

Looking ahead, P&G said the next year will remain challenging. The company predicted modest improvement with organic sales expected to be flat to up a few percentage points. Foreign exchange is predicted to be a 4 to 5 percent drag on sales growth – meaning it could erase $3.1 billion to $3.8 billion in sales.

"We've got several months of tough sledding ahead – we're just trying to be realistic," CEO A.G. Lafley said in a conference call with Wall Street analysts.

P&G's stock closed Thursday at $77.39, down 4 percent or $3.23. Trading was heavy with more than 22 million shares changing hands, or nearly three times average daily volume.

On the conference call, Lafley and chief financial officer Jon Moeller tried to reassure Wall Street analysts the company's turnaround plan would ultimately strengthen results. One analyst asked the duo if P&G has considered breaking up into multiple companies.

"We are re-balancing and refocusing this company to reinvigorate it," Lafley said.

Analysts and investors have grown restless with P&G, which hasn't been able to meaningfully grow its total sales for five years. Lafley, who came out of retirement in 2013 to jump start growth efforts, has pursued a strategy of jettisoning slower-growing brands to simply P&G operations.

P&G's pending divestitures of nearly 100 brands will cut annual sales by 15 percent, but dramatically reduce complexity and leave the company with 65 core brands that are growing faster, Lafley and Moeller said.

"We know the top line (sales) has to grow, we can't get to our objectives with just profit growth... so we get it," Moeller said.

Moeller said P&G will continue its cost-cutting initiatives, including its restructuring program announced in 2012 that has since slashed 13,000 office jobs. He added P&G will begin targeting closure this year of its network of 40 U.S. distribution centers, now that six super distribution center (including the new Dayton facility) are up and running.

Unimpressed, Bernstein analyst Ali Dibadj – who has suggested in reports splitting the company into pieces – pressed his case on the call.

"I'm struggling to see what will be different – is that it? How long do you want us to wait until you consider bigger changes?" asked Dibadj. "You keep saying 'Trust us... It'll turn, it'll turn.'"

Lafley replied the company's current strategy of selling off dozens of brands is similar to P&G's past exit from the food and beverage industry, which was an orderly, piece-by-piece retreat that bolstered shareholder return.

P&G officials also noted the company's core gross profit margin and operating margins improved by 1.3 percent. They also noted the company is reinvesting proceeds from efficiency efforts back into the business, spending money on the new distribution centers,building a large new factory in West Virginia as well as doubling the size of its plant in Utah.

A year ago, P&G reported a $11.6 billion profit on sales of $83.1 billion. Excluding one-time items, Wall Street analysts expected P&G to report an $11.4 billion profit on sales of $76.4 billion, according to Bloomberg.

Moeller said currency rates have punished company results. For example, he noted devaluation of the Russian ruble forced P&G to boost prices to maintain profitability, but that reaction depressed Russian sales by a whopping 57 percent in the April-June quarter.

The financial results cap a busy year for P&G. One year ago, Lafley unveiled the plan to shed up to 100 non-core brands to refocus the company on faster-growing business units.

On Thursday, Moeller said the company's core brands that are staying at P&G were growing at a faster clip than the company as a whole. He said had all the brand divestitures closed organic sales would have increased by 2 percent instead of 1 percent.

Earlier this month, P&G wrapped up most of the deal-making with a $15 billion plan to carve out the company's hair coloring, cosmetics and licensed fragrance businesses and merge them by late 2016 with New York-based Coty Inc. Other previous divestitures include deals to sell the Duracell battery business to Warren Buffett's Berkshire Hathaway and selling off Iams and other pet food brands to Mars and other companies.

On Tuesday, P&G also announced that Lafley will become executive chairman on Nov. 1 as David Taylor, the global head of beauty, grooming and health care takes over as CEO.

Previously CEO from 2000 to 2009, Lafley returned to P&G in 2013 to restore consistent sales and profit growth.

The Enquirer will update this story.