Bank of America Merrill Lynch hosted meetings with Procter & Gamble Co (NYSE:PG) in conjunction with BofA ML’s Consumer Conference. Key topics discussed included: (1) growth challenges across U.S. consumer categories, (2) M&A and activism, (3) portfolio/category positioning and pricing, primarily focused on Gillette, (4) competition from traditional rivals and new entrants, and (5) the evolving retail environment. U.S. growth has been more challenged to start the year, a topic discussed at CAGNY and further corroborated by recent Nielsen data (last published March 7th), and while BAML's impression is that challenges have continued, the firm does not believe they have worsened.
Heavier promotions in recent months could have led to higher at-home inventory levels for consumers to work down, further exacerbating retail destocking already taking place due to the shift online and as retailers look to get tighter on inventory. While BAML suspects competition will remain heavy, and pressure on retail inventory levels and hence sales is here to stay as online grows disproportionate to brick & mortar, the firm senses that current weakness should abate as consumers return to more normal purchasing patterns. If weakness is indeed tied in part to delayed tax returns, an idea floated by several retailers at the conference, then the firm suspects those pressures too should alleviate over time.
BAML does not see a need to adjust its FY17 expectations after discussions. Heavy competition and U.S. retail inventory cuts in key categories are challenges but BAML sees this balanced by a clear strategy to leverage cost savings to reinvest behind growth. The Gillette price cut going into place at the end of the month is an admission of limits even in brands with leading share and strong equity, but also reflects the significant price gap that had developed between Gillette and competition, a dynamic unique to the men’s shaving category. The risk from here is if U.S. retail challenges persist through FQ3 and into FQ4 (i.e. after the transitory items like delayed tax returns and consumer pantry deload pass). The operating environment is challenging for Staples, but PG’s savings plan is amongst the most robust vs peers, and potential for more is not reflected in current valuation. Moreover, given recent M&A/activism interest across the sector and for P&G specifically, BAML expects investors will be more willing to weather near-term challenges.
The companies mentioned in this article are subjects of research reports issued recently by investment firms. Their opinions in no way represent