The Big Trim At Gillette
When Alfred M. Zeien stepped down after eight years of mostly spectacular results as CEO of Gillette Co., his final act was to assure investors at the April annual meeting that the troubles of his last months at the helm were over. There would soon be, Zeien promised, a "rolling thunder" of good news. "Gillette is a great investment," he roared, predicting that by the second half of 1999, "we will return to our historical 15% to 20% growth in earnings."
It gave Zeien a nice exit but left his successor, Michael C. Hawley, with a promise that couldn't be kept. With only a gradual turnaround in the foreign markets that cratered two years ago and continuing weakness in lines beyond the three Bs--blades, batteries, and (tooth)brushes--Gillette is nowhere near its old game. In the first nine months of 1999, net income slumped 7%, to $921 million, on flat sales of $6.9 billion. Its shares, at 35, are down 45% since March.
Now, Hawley is promising his own turnaround--on his terms. On Oct. 21, he announced a plan to take a huge whack out of Gillette's bulging inventories--even though that will produce a double-digit earnings decline in the fourth quarter. And, he says, this is the end of the line for poorly performing noncore businesses. Unless he can be convinced by early 2000 that they can be turned around, Hawley says, he's ready to get rid of such businesses--which together make up 15% of the company's $10 billion in annual sales. And, vows Hawley, "we're going to be the fiercest competitors in the world" in razor blades, batteries, and oral care. That, he says, will restore Zeien's double-digit earnings gains.
LINGERING PROBLEMS. "Hawley is addressing all the items on the laundry list of what needs to be done," says Jay H. Freedman, an analyst for institutional shareholder Lincoln Capital. "But the question is whether the shirts will come out starched." Indeed, the affable Hawley--a 36-year veteran of Gillette--seems an unlikely axman.
Part of the task will be to attack long-simmering problems left untended by Zeien. A key problem is inventories. Under Zeien, "there is no question Gillette was making its numbers (in part) by aggressively selling to the trade, and building inventories," charges William H. Steele, an analyst with Bank of America Securities. At the end of June, Gillette had $1.3 billion of finished goods inventories, up 43% since the end of 1996, even though Gillette's sales have barely increased since then. And its customers' warehouses are bulging.
In the fourth quarter, Gillette will cut customer inventories by reducing shipments. In effect, Gillette will give up four weeks of razor-blade sales in Europe and two to three weeks globally. Hawley concedes that will produce an earnings decline in the "mid- to high teens." The payoff will come next year, when a similar attack on in-house inventories and receivables should free up $500 million in cash flow, much of which will be used to pay down debt. "This is a big step toward becoming a much more efficient company," says Steele.
Hawley also promises ruthless cuts to the product portfolio. The most likely products to get the ax are pens, which include such well-known brands as PaperMate, Parker, and Waterman. With operating earnings down 78% in the first nine months of 1999, the business is gasping for life. But Parker and PaperMate are about to introduce products that Petter Knutrud, senior product manager for writing instruments at Staples Inc., believes could save one or more of the brands.
BAD TIMING? Hawley is likely to be more selective in pruning the other two troubled units, Braun and toiletries. At Braun, where profits plunged 43% in the first nine months, he's keeping electric shavers and electric toothbrushes, but the $600 million household and personal-care appliance units look vulnerable. Analysts would welcome a sale but complain that Gillette could have gotten more earlier. Following Sunbeam's collapse and Black & Decker's decision to sell its appliances, Braun "wouldn't be a particularly lucrative sale," warns Nicholas P. Heymann at Prudential Securities. Hawley might settle for finding a joint-venture partner or licensing some of Braun's products.
In the $1.2 billion toiletries line, Gillette is already in negotiations to sell White Rain shampoo, which commands just 2% of the U.S. market, according to market researcher Information Resources Inc. But Hawley wants to keep shaving cream and deodorant--even though the business earned an operating profit margin of just 4.4% last year, vs. 38% in the razor-blade unit.
Pruning deadwood that represents 15% of Gillette would certainly put Hawley's stamp on the company. Although Gillette would be smaller, its margins and earnings growth would expand. Moreover, getting rid of such problem kids as pens and appliances would let management focus on the units in which prospects are brightest. Zeien was never willing to throw in the towel on these businesses. "Gillette overestimated what they could do," says Gary Stibel, principal and founder of New England Consulting Group. "But now they finally have a management team that understands what Gillette is and is not capable of doing." If Hawley doesn't put down that ax.