P&G posts surprise sales drop on slowing demand for face lotions, diapers

By Ananya Mariam Rajesh and Jessica DiNapoli

(Reuters) -Tide maker Procter & Gamble reported a surprise drop in quarterly sales for the second time in a row, as consumers in the United States, its biggest market, bought fewer name brand products and Chinese shoppers shunned them.

P&G's CFO Andre Schulten sought to reassure investors, saying on Friday there were "no indications that the consumer is not with us." Shares of the Dawn dish wash maker closed flat on Friday.

Analysts and investors said economic uncertainty in the U.S. market - which accounts for nearly half of P&G's total sales - has prompted some lower-income consumers to turn to rivals offering discounts, and cheaper private-label brands.

Growth in P&G's first-quarter organic sales in North America slowed to 4% from 7% seen a year earlier, as its reliance on price hikes faltered, while volumes rose.

The company's baby, feminine and family care segment, housing iconic diaper brand Pampers, saw a 2% fall in sales during the quarter while its beauty segment, which includes troubled Japanese skincare brand SK-II, saw a 5% drop.

"Consumers aren't feeling good out there after the bout of inflation we've had over the recent years, so we need an improvement in sentiment...for a company like this to do better," said Don Nesbitt, senior portfolio manager at F/m Investments, which has a stake in P&G.

The company maintained its forecast for the upcoming year.

"Pricing initiatives by the company didn’t fully translate into the quarterly sales growth the street expected," said Louise Dudley, portfolio manager at P&G investor Federated Hermes. "P&G is seen as the bellwether for consumer habits and the company delivered roughly in line with expectations, with results and outlook suggesting little has changed."

Another barometer of consumer sentiment, packaged food maker Nestle on Thursday noted a weak demand environment would continue, flagging pressure from weaker economies such as Latin America, and cut its annual sales forecast.

CHINA TROUBLES

A prolonged property crisis and rising youth unemployment have resulted in a grim demand environment in China, which has hurt P&G's sales volumes in the country. P&G's organic sales in China fell 15%, as anti-Japanese sentiment there weighs on the company's high-end SK-II skin care brand.

China makes up for the bulk of P&G's international revenue, which accounts for more than half of the company's total sales.

"China, as we had expected, continues to be softer from a consumption standpoint ... the market continues to be weak and will be weak...for a number of quarters to come," CFO Schulten said.

Schulten said the company would launch a slate of new and improved products in the second half of the year, which should sustain growth and help boost the core business.

P&G is looking to "rejuvenate" parts of its Olay beauty business, Schulten said, adding that Melts, the brand's dissolving face wash cubes, are doing very well.

The company is also making progress on scaling up manufacturing of Tide Evo, an eco-friendly laundry detergent in a tile form, as it prepares to launch it across the United States. Consumers have been testing new laundry detergent formats.

Relaunching Luvs diapers could turnaround the company's baby care segment, said Michael Ashley Schulman, chief investment officer at P&G investor Running Point Capital.

Brian Jacobsen, chief economist at Annex Wealth Management, said, in recent years a relatively stronger consumer tilted the balance towards U.S. growth being the main driver, but now, "that is trickier due to the competitive landscape in the US, especially with the consumer revolting against price hikes."

The main volatility in the business is, however, entirely due to China and conflict in the Middle East, P&G said.

In some countries, people have called for boycotting P&G products as the company gets swept up in widespread consumer boycotts of U.S. brands because of perceived ties to Israel.

The company reported a 0.6% fall in first-quarter net sales to $21.74 billion, compared with analysts' estimates of a 0.2% rise to $21.91 billion.

P&G maintained its annual organic sales growth forecast of a 3% to 5% rise and core earnings per share expectation of $6.91 to $7.05.

The company, which has been reeling in years of steep price hikes with some promotions, reported a 1% rise in average prices across its product categories, and a 1% gain in overall organic volumes in the reported quarter.

Higher prices helped P&G report adjusted profit per share of $1.93, above analysts' average estimate of $1.90, according to data compiled by LSEG.

(Reporting by Ananya Mariam Rajesh in Bengaluru and Jessica DiNapoli in New York; Editing by Shinjini Ganguli and Deepa Babington)