When a giant public company says one of its most prominent businesses has shed billions of dollars in value, investors might want to run in the other direction.
But that’s not what happened this week at Procter & Gamble. The bean counters in Cincinnati decided that it was time to reassess the shrinking might of Gillette, the Boston razor maker that P&G acquired in 2005 for a cool $57 billion.
The Gillette grooming business, they calculated, had lost $8 billion in value since the acquisition closed 14 years ago. They blamed currency fluctuations and competition from upstarts, not to mention all the bearded millennials who are simply burning through fewer blades. (Worth noting: The decline doesn’t reflect the other businesses that came with the Gillette acquisition, including the Duracell battery division that P&G later sold.)
A grim number, for sure. But P&G’s stock rose on Tuesday by some 4 percent. Shareholders chose to focus on the good news in the quarterly earnings: Adjusted earnings beat expectations, and P&G enjoyed a 4 percent year-over-year organic sales growth in the grooming division. Analysts either downplayed the impact of the Gillette disclosure in their latest reports on the company, or didn’t bother to mention the write-down at all. (In fact, the stock has been on a tear for a while.)
So what happened? P&G had finally put a number on something investors have long understood. As Jonathan Feeney, an analyst at Consumer Edge Research, puts it, the $8 billion write-off reflects baseball that’s already been played.
And, to extend the metaphor, the game hasn’t always been played well by P&G. Feeney notes that P&G’s global grooming sales in the fiscal year that just ended — $6.2 billion — were 26 percent below 2012 levels. That’s more than $2 billion in annual revenue out the door. However, Feeney says he’s optimistic that the worst is probably behind the company.
The two upstarts considered most to blame — direct-to-consumer operations Harry’s and Dollar Shave Club — are now tied to conglomerates, too. Unilever bought Dollar Shave Club in 2016, while Schick parent Edgewell is acquiring Harry’s.
These rivals had countered Gillette with lower-priced offers in recent years, slicing away at Gillette’s dominant market share. Gillette responded by cutting blade prices by 12 percent in 2017.
But the grooming business, under the leadership of Gary Coombe, has taken a different approach in the past year or so. Price cuts have been de-emphasized. Coombe instead has focused intensely on building up Gillette’s mail-order market, and rolling out new twists such as a blade for men with sensitive skin. The company has shifted its marketing efforts to court those all-important millennial consumers, including a controversial take on its “the best a man can get” mantra aimed at countering sexism and bullying.
On the Tuesday earnings call, P&G chief financial officer Jon Moeller played down the impact from its rivals. Unilever and Edgewell need to make money from their acquisitions, he said, not a bad thing for the “overall value creation” opportunities in the industry. (Translation: Maybe those companies will have to raise prices.)
Forget about bearded hipsters or hungry startups for a moment. P&G executives say the biggest reason for the huge decline in Gillette’s valuation on their books can be attributed to forces well beyond their control: the rise of the US dollar, and the corresponding decline of currencies in many countries where P&G sells its blades and razors. Only one-fourth of P&G’s grooming sales take place in the United States, so these currency shifts influence the top line in a major way, particularly when tallied up over the past decade or so.
Moeller and his boss, chief executive David Taylor, remain big believers in the future of the grooming business. Let’s hope so: The jobs of the 1,200 Massachusetts employees who still work for Gillette in South Boston and Andover depend on it.
P&G executives are now showing momentum with their turnaround efforts. But they still need to prove to Wall Street that King Gillette can reign supreme again in the shaving world. Otherwise, investors might not be so kind the next time.