The Wall Street Journal-20080201-P-G- Colgate Move to Reassure They Can Weather Economy

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P&G, Colgate Move to Reassure They Can Weather Economy

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Consumer-product makers Procter & Gamble Co. and Colgate-Palmolive Co. reported better-than-expected quarterly earnings and tried to reassure investors worried over their ability to weather macroeconomic pressures.

P&G executives said yesterday that while the company is seeing a "modest" slowdown in the U.S., sales for the industry world-wide are up 3% to 4%, and sales in developing markets remain strong. P&G also confirmed plans to break off its slow-growing Folgers coffee business into an independent company.

As the world's largest consumer-goods company, P&G is considered by investors to be a significant indicator of consumer spending. The Cincinnati-based maker of Crest toothpaste and Gillette razors, among other items, emphasized that even amid signs that U.S. consumer spending is slowing, shoppers aren't choosing less-expensive private- label products over P&G's brands.

"People are not reducing their tooth-brushing incidents, they're not going to the bathroom less often, and they're not meaningfully shaving less often," P&G Chief Executive A.G. Lafley said on a conference call.

Investors didn't seem completely sold. In 4 p.m. New York Stock Exchange composite trading, shares were up 33 cents to $65.42. Investors appear concerned about P&G's lower-than-expected outlook for its current quarter, which P&G says is a result of high commodity and energy costs. P&G estimates its earnings per share will be 79 cents to 81 cents for its fiscal third quarter, compared with analysts' average estimate of 83 cents. P&G also raised by a penny the top end of its full-year earnings-per-share forecast, making the new range $3.46 to $3.50.

Jittery about the potential impact of lower consumer spending and the global macroeconomic environment, investors have pushed Procter's share price down 11% since the start of this year.

"The main thing for us is the significant hit on gross margins driven by commodities," says Sanford Bernstein analyst Ali Dibadj of P&G's results. To help offset its higher commodity costs, P&G reaffirmed its plans to increase prices in coming months on some products, generally in the range of 4% to 8%.

Strong sales of Crest toothpaste, Oral B toothbrushes and Pampers diapers helped boost P&G's results for its fiscal second quarter ended Dec. 31.

P&G's decision to separate its Folgers business, which posted annual sales of $1.6 billion in the previous fiscal year, is part of the company's plan to let go of underperforming brands. P&G said no decision had been made on the form of the separation, but that it prefers what it terms a "split-off," wherein "P&G shareholders would be given the option of exchanging their P&G shares for shares in the newly formed coffee company," P&G said. This move, the company said, would likely be a tax-free transaction for shareholders and result in lower annual-earnings dilution. P&G said it expects to complete the transaction by the end of the year.

Rival Colgate, with less exposure to the U.S. market than P&G, got a better response from Wall Street. Its share price rose $3, to $76.50 in the NYSE. The New York maker of Hill's pet food, Palmolive dish soap, Colgate toothpaste and other items said its fourth-quarter results were helped by cost cuts and restructuring efforts. "So far we are seeing no indication of a slowdown," Colgate Chief Executive Ian Cook said in a conference call.