A quick glance at the balance sheet reveals that Proctor & Gamble (NYSE: PG) has some serious problems. The most recent data indicates that the venerable consumer products manufacturer’s revenues dropped by $11.87 billion over the past two years.
Proctor & Gamble reported revenues of $81.6 billion December 2013, $76.5 billion in December 2014, and $69.73 billion in December 2015. That means, P&G lost $5.1 billion in revenue in 2014 and $6.77 billion in revenue in 2015. The revenue losses are accelerating and will probably be much worse when the company reports its first quarter 2016 revenues.
These figures indicate that P&G may no longer be the leader in American consumer products it once was. Although, the company still has a tremendous lead in some sectors. Proctor & Gamble’s flagship product; Tide, is still America’s most popular laundry detergent. Tide’s sales ($1.195 billion) are more than double those of the nearest competitor Gain ($545.9 billion); which is also a P&G product, Statista data tells us.
Yet the revenue numbers show us that Proctor & Gamble is having a serious time maintaining sales and market share. It looks as if its revenue is collapsing, which means its dominant position in some sectors could be eroding.
Why are Proctor & Gamble’s Revenues Collapsing
There are a number of potential causes for the P&G revenue collapse including:
- Deep discounting by giant retailers that control a growing percentage of the market. This includes Walmart Stores Inc. (NYSE: WMT) with 4,177 stores in 2015, Kroger (NYSE: KR) with 1,330 supermarkets, Walgreens Boots Alliance (NASDAQ: WBA) with nearly 13,000 drug stores, Dollar Tree (NASDAQ: DLTR) and Dollar General (NYSE: DG); which each operate around 11,000 dollar stores, Amazon (NASDAQ: AMZN), Target (NYSE: TGT) and Costco Wholesale (NASDAQ: COST). These companies all have the leverage to force P&G to cut prices, and some of them; including Kroger and Walgreens, regularly use popular brands such as Tide and Gain as loss leaders.
- The decline of Walmart, which saw its revenues drop by $3.52 billion in 2015. Walmart is one of the main sales outlets for Proctor & Gamble products and people seem to be shopping there less. It actually made news when Walmart’s foot traffic at US stores increased by 1.4% and its same store sales grew by 1.2% during the fourth quarter of 2015.
- Changing shopping habits including the growth of online shopping (some observers believe that Amazon’s sales rose by 97% in 2015) and the preference for smaller, more compact stores. People are spending less time in stores; which means fewer people see all those Tide displays.
- The decline of legacy media such as broadcast television and newspapers. Fewer people see Tide advertisements or get coupons for Gain every week. P&G is heavily invested in legacy media; the company actually invented daytime soap operas to sell laundry detergent.
- Growing income inequality and wage stagnation. Households with less money to spend are more likely to pinch pennies on items like laundry detergent.
- The growing popularity of private label brands such as Costco’s Kirkland, and popular offerings at Aldi, Trader Joe’s and Kroger. These are usually cheaper and often sold as loss leaders. This can have a strong appeal to increasingly cash-strapped middle and working class families.
- A new generation of shoppers with little or no brand loyalty. These people have grown up surrounded by high-quality, lower-priced label products. They also have far less exposure to traditional advertising through their media choices – video games and streaming video instead of network television.
- The roll out of Henkel AG’s (OTCKPK: HENOY) Persil; Germany’s answer to Tide, in American markets. Several large US retailers including Kroger, Walmart and Kmart now have Persil on their shelves.
- The popularity of new retail outlets such as Aldi and Trader Joe’s that emphasize private-label brands, rather than consumer staples like Tide.
As you can see P&G has is facing a dramatically changing marketplace in which it seems to be far less competitive. Naturally, many people will be wondering if Proctor & Gamble is still a value investment.
Does Proctor & Gamble make Money?
The good news for investors is that Proctor & Gamble still makes a lot of money, just not as much as money as it used to. P&G reported a net income of $8.481 billion on December 31, 2015, down from $9.55 billion in December 2014 and $10.9 billion in December 2013.
The company also reported a free cash flow of $3.789 billion up from $2.603 billion in December 2014, and $2.361 billion in December 2013. The cash from operations was $15.56 billion in December 2015, a slight drop from $15.68 billion in December 2014 and a massive improvement over the $13.6 billion reported in December 2013.
Proctor & Gamble also has a lot of money in the bank. It reported $14.28 billion in cash and short-term investments in December 2015. That was a more than $2 billion increase over December 2014 when the company had $12.25 billion in the bank and a nearly four billion dollar increase over December 2013 when the company had $8.503 billion in cash and short-term investments.
P&G is a Value Investment
These numbers show us that Proctor & Gamble is a great company with a good business model that generates a lot of float. It has a lot of cash and that cash is increasing. These numbers mean that the revenue losses might not affect the company’s long term operations.
The financial numbers indicate that the strength of P&G’s brands; particularly Tide, offsets losses in sales volume. The major reason for this is that the public views Tide as a superior product and is willing to pay more for it.
To add icing to the cake Proctor & Gamble shareowners received a 67¢ dividend and a dividend yield of 3.21% on April 18, 2016. They also enjoyed a 13.78% return on equity.
Proctor & Gamble is well worth the $82.7 its shares were trading for on April 18, 2016. Despite the revenue losses, P&G is definitely a widows and orphan stock that belongs in portfolios because it will continue to make money for many years to come.