Gillette Warns of Poor Results, Plans Layoffs

From Bloomberg News

Gillette Co., the biggest maker of razors, will cut 4,700 jobs, or 11% of its work force, and close dozens of plants and offices to slash costs amid a surprise 20% drop in third-quarter profit.

Gillette said it would about break even in the quarter, even after a charge of about $350 million, or 30 cents a share. That will shatter a string of eight years of rising quarterly profit.

The company is the latest in a series of consumer-product makers ranging from Coca-Cola Co. to Procter & Gamble Co. to be hurt by recessions in Asia, slowing economies in Latin America and the rising dollar. Gillette gets a third of its revenue outside the U.S. and Western Europe from its razors, Duracell batteries, Papermate pens, Braun appliances and other products. The moves will save $200 million a year by early 2001.

"When times are tough, good managers use that as an opportunity to cut fat," said money manager David Polen of Polen Capital Management.

The Boston-based company was expected to earn 40 cents a diluted share in the third quarter, according to analysts polled by First Call Corp. It earned 38 cents, adjusted for a stock split, a year earlier. Gillette was expected to earn 44 cents at the beginning of the quarter.

Gillette also said it expects fourth-quarter earnings to rise in the "low double-digits." It was expected to earn 41 cents, up from 36 cents a year earlier, according to First Call.

The announcement was made after the closing of trading. Gillette shares, which rose $1.69 to close at $40 Monday on the New York Stock Exchange, have lost about a third of their value the last six months, compared with the 4.3% drop in the Standard & Poor's 500 index.

Gillette said the company plans to close 14 factories and 12 warehouses over the next 18 months, and close or consolidate 30 offices. It has about 43,000 employees.

Gillette executives said during a conference call that the third quarter was expected to be a difficult one because the recent introduction of the Mach3 razor initially hurt the lucrative sales of blades. The purchase of a new razor--the most expensive new Gillette product to date--typically includes a number of new blades.

Yet declining sales outside the U.S.--especially in Russia and Brazil--brought about the lower profit.

Distributors in emerging markets have been buying fewer Gillette products because of their financial problems, said Ajay Mehra of Columbia Management.

"The core business and consumer demand are fine," he said. "We hope the worst is over."

Falling currencies in Asia and Latin America mean Gillette will generate fewer dollars from local sales. Analysts have said the company doesn't typically hedge currencies, and instead relies on strong economies to offset weak ones.

Gillette said two weeks ago that third-quarter sales will drop from the year-ago period.

The last time Gillette's profit declined was in 1990 following another razor introduction.

"Mach3 is going gangbusters," said Chairman Alfred Zeien. "If anything, the results [from the new razor] are better than we had expected."

Gillette invested about $750 million to develop the Mach3 razor, the successor to its popular Sensor line. It began shipping the new razor to retailers July 1.


Harsh Shave

Gillette shares plunged 44% from their 1998 peak to their recent low, but have edged higher in recent sessions. Monthly closes and latest on the NYSE:

Monday: $40

Source Bloomberg News



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