Gillette Regains Its Edge: 6% Sales Gain Seen
Gillette Co., which fell from grace as a favorite growth stock when its long string of earnings gains was abruptly snapped last year, took a big step toward redemption Monday.
Shares of the giant personal products maker soared 14% after Gillette said its fourth-quarter sales will rise about 6% from a year earlier--reversing a 6% decline in the preceding quarter--and predicted higher fourth-quarter profit “in line” with analysts’ forecasts.
For the fourth quarter ended Dec. 31, Gillette is expected to earn 39 cents per diluted share, according to a consensus of analysts polled by Zacks Investment Research Inc. Gillette also predicted that earnings per share will resume their traditional double-digit growth in the second half of 1999, with gains of 15% to 20%.
Moreover, the rebound is being powered in large part by strong sales of Gillette’s new, three-blade Mach 3 razor, which means that the $1 billion Gillette spent to develop and promote the razor is, at least initially, paying off.
Gillette’s stock soared $6.50 a share, to $52.38, in heavy New York Stock Exchange composite trading. The shares have now jumped about 40% since they bottomed in price in mid-September, after Gillette warned that its third-quarter 1998 performance would come up short.
Besides being the dominant producer of razors and blades, Boston-based Gillette makes Braun razors, Oral-B toothbrushes, Duracell batteries, Right Guard deodorants and Paper Mate pens.
Despite its fourth-quarter comeback, Gillette hasn’t left all of its problems behind.
About 70% of the company’s sales come from foreign markets, and economic weakness and currency crises in many of those regions--especially Asia, Latin America and Russia--were the major reasons Gillette’s string of 32 quarters of double-digit growth in earnings per share (excluding one-time items) came to an end in the third quarter.
“International [business] remains a challenge,” said analyst Amy de Rham of NationsBanc Montgomery Securities in San Francisco. “We’re keeping an eye on Latin America and Japan.”
But Gillette maintained that its foreign problems are improving. After dropping 14% in the third quarter, international sales fell 11% in the fourth quarter, “and we expect that trend to continue improving,” Gillette spokesman Eric Kraus said.
Through the first nine months of 1998, Gillette’s profit tumbled to $646 million from $1 billion a year earlier, while sales dipped to $6.9 billion from $7.1 billion. The latest results were also reduced by a one-time charge of $347 million to cover 4,700 layoffs and the closing of 14 factories and 12 warehouses, as Gillette moved to cut costs in the face of the sales slowdown.
The problems last year at Gillette, and at other giant U.S. multinationals such as Coca-Cola Co., were key ingredients in the stock market’s general nose dive during the summer. Concern heightened that the companies’ growing reliance on profits from emerging markets was becoming a liability.
Those concerns have eased amid the stock market’s rebound, but Gillette’s statements didn’t trigger additional gains for other multinationals Monday. Coke fell $1.94 to close at $66.06 a share, McDonald’s Corp. lost $2.63 to $77.88, and Procter & Gamble Co. dropped $1.94 to $87.25.
Gillette’s results also faltered last summer because retailers pared their orders for Gillette’s Sensor razors and blades to make room for the Mach 3, which debuted in July in the U.S. market and in September in Europe.
But the Mach 3 is off to a fast start. The new razor is “exceeding our expectations by every measure,” Kraus said.
The Mach 3 accounted for 55.7% of U.S. dollars spent on razors in the four weeks ended Nov. 8, powering Gillette’s total share of the razor market to 83.1%, according to Information Resources Inc., a consumer products research firm in Chicago.
That figure is probably skewed a bit high because it covers such a short time frame, and even Gillette puts its total market share closer to 70%. But even at that level, Gillette said, it’s enjoying its highest combined market share since 1962.
Mach 3 blades, meanwhile, were first in the replacement-blade market with a 20.4% share, which topped the 17.3% shares held by both the plain Sensor and Sensor Excel blades, IRI reported.
Whether Gillette will again become an investor favorite is an open question, because the company’s downfall last year jolted investors’ confidence. Before then, Gillette’s dominance of the razor market, its consistent earnings gains and its successful acquisitions, such as Duracell, made the stock a perennial favorite.
And even with its rally Monday, Gillette’s stock remains well below the $60-a-share level it pierced in July, while the broader market has fully recovered its summer losses and set new highs.
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Bloomberg News was used in compiling this report.
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Turnaround?
Gillette shares jumped $6.50 on Monday on an upbeat earnings forecast, but the stock is still below its 1998 peak of $62.63. Monthly closes and latest on the NYSE:
Monday: 52.38
