P&G’s McDonald Risks Giving Ackman Ammo With Sales Drop

P&G’s McDonald Risks Providing Ackman Ammo With Sales Decline
Last month, Bill Ackman’s Pershing Square took a $1.8 billion stake in Procter & Gamble Co. and said he would push for change. Photographer: Norm Betts/Bloomberg

Procter & Gamble Co. Chief Executive Officer Bob McDonald risks giving activist investor Bill Ackman more ammunition to press for management change as the company is poised to report its first sales drop in more than two years.

P&G, which reports results tomorrow, is projected to post a 2.9 percent decline in revenue to $20.2 billion, according to the average of analysts’ estimates compiled by Bloomberg. Analysts estimate the consumer-products maker’s profit excluding some items will be 77 cents a share.

A positive surprise would help McDonald make the case his plan to save $10 billion by 2016 through cuts in jobs, material expenses and marketing costs is working. The board is monitoring his plan after he disappointed investors by lowering profit forecasts three times this year, contributing to a 4.8 percent drop in P&G’s stock price.

“The questions about leadership will go away if Procter exceeds on the upside on earnings, revenues and outlook,” said Matt McCormick, who helps oversee $6.2 billion, including P&G shares as a fund manager at Bahl & Gaynor Inc. in Cincinnati. “And until it does, those questions are going to remain.”

Last month, Ackman’s Pershing Square took a $1.8 billion stake in P&G, and people familiar with the matter said he plans to press for management changes after market-shares losses on products that include laundry and dish detergent in North America. P&G’s board has been dissatisfied with McDonald’s performance and discussed a possible leadership switch, people familiar with the situation told Bloomberg last month. The board later said publicly that it unanimously supports him.

Paul Fox, a spokesman for P&G, declined to comment.

Raw Materials

Like Kimberly-Clark Corp. and Colgate-Palmolive Co., P&G is paying more for the raw materials used in its products, which range from shampoos and house cleaners to batteries and pet foods. The stronger dollar also has reduced the value of their sales abroad at the same time that economies in Europe are slipping into recession.

P&G hasn’t weathered the storm as well. The company has cut its profit forecast three times this year, most recently in June, while Kimberly-Clark and Colgate have managed to stick to their projections.

Analysts including Citigroup Inc.’s Wendy Nicholson and Sanford C. Bernstein & Co.’s Ali Dibadj chided McDonald during the company’s April earnings call for making excuses and moving too slowly.

“I’m just trying to understand how long do you expect investors to wait?” Dibadj said on the call. “How long does your current plan have to work? How much patience does the board have?”


By contrast, Kimberly-Clark last week said second-quarter profit rose 22 percent to $498 million, helped by sales growth and cost-cutting. It boosted its adjusted annual profit forecast by 5 cents to as much as $5.20 a share.

P&G’s shares have been left behind as well, as Colgate gained 14 percent this year and Kimberly-Clark climbed 18 percent. P&G fell 0.8 percent to $63.51 at the close in New York today.

The performance gap prompted Ackman’s Pershing Square to make its stake in P&G its largest initial investment ever. He plans to seek other investors to help push for management changes or asset sale to boost the shares, according to people familiar with the matter.

P&G in May sold its Pringles potato-chip business to Kellogg Co. for about $2.7 billion.


McDonald “should have been more cost-focused when he took over, and I still think there’s more that can be done in that area, notwithstanding the February announcement,” Dan Popowics, a portfolio manager at Fifth Third Asset Management in Cincinnati, said in a telephone interview. His firm holds 1.8 million P&G shares among its $15 billion in assets under management.

McDonald’s plan may save closer to $4 billion than the projected $10 billion, Dibadj has estimated. The company has more room to prune its “convoluted, redundant, heavy organizational structure,” Dibadj wrote last month. He also suggested that P&G use some savings to narrow price gaps with competitors and consider selling some assets or even breaking up the company.

Investors will give P&G’s management next year to show progress, and the company likely will address their concerns at meetings later this year, said Connie Maneaty, an analyst at BMO Capital Markets in New York.

‘Early Days’

“It’s still the early days,” she said. “If truly the next nine to 12 months don’t show results, then you’ve got a real great case for CEO change and changes to the board. But I think it’s premature to expect those things to happen right now just because of the new involvement of an activist.”

P&G should consider buying back stock to boost the shares, Don Yacktman, president of Austin, Texas-based Yacktman Asset Management Co., said in a telephone interview. P&G is the largest holding for the firm, which has about $17 billion under management.

“From an investment standpoint, from where we are, the main driver is the price, and the stock has come down to very cheap levels,” Yacktman said.

Ackman has a mixed record of forcing change at his targets. He pushed Fortune Brands Inc. to break up, and the company last year split into spirits maker Beam Inc. and a company that sells home products such as faucets and locks. More than two years ago, he led a failed effort to get Target Corp. to sell its card unit and divest its land holdings into a real estate investment trust.

More relevant for 59-year-old McDonald, Ackman this year won an effort to remove Canadian Pacific Railway Ltd. CEO Fred Green.

“The results are crucial -- I think it’s much like a primary,” Bahl & Gaynor’s McCormick said. If the results aren’t good, “Ackman’s supporters will be able to push their argument more.”

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