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Gillette's unkind cut
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October 21, 1999: 7:06 p.m. ET
Move to cut customer inventories will lead to a big drop in 4Q earnings
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NEW YORK (CNNfn) - Gillette Co. warned investors they'll see a much worse-than-expected fourth quarter, forecasting a double-digit drop from the year-ago period rather than the 8 percent rise in earnings per share that analysts had been expecting.
Michael Hawley, chairman and chief executive, said in announcing the third quarter earnings that the company has taken action in Europe that will result in a quarterly earnings percentage decrease in the "middle to high teens" along with a "mid-single digit" drop in sales.
The third quarter results were in line with expectations, as the company posted net income of $352 million, or 32 cents a share, in line with expectations of analysts surveyed by First Call.
Gillette (G) said the drop in profits and sales in the fourth quarter is because retailers, especially in Europe, are rapidly consolidating as well as improving their supply chains and cutting inventories. Therefore Gillette said it will cut its shipments to European customers in the quarter, leading to a drop of their inventory of Gillette razors and blades from about 12 to 13 weeks to about nine weeks. The company said 30 percent of its razors and blades are sold in Europe.
Gillette will therefore see a sales decrease overall in the mid-single digits in the quarter, even though it does not expect that consumers will buy less of its products.
"We did the same thing over a period of two years in U.S.," said Patricia Klarfeld, a company spokeswoman. "Because consolidation is coming even faster in Europe, we have chosen to go ahead and take this action over a shorter period of time."
The company said it was confident the long-term outlook is a good one, despite the difficult fourth quarter.
"Gillette remains confident that the continued strength of its core businesses, benefits from its reorganization and its optimization of trade inventories, coupled with an improvement in international economies, bode well for a return to its historic high growth rates in the near future," said Hawley.
The earnings and warning were announced after the market closed Thursday. Gillette's stock closed at 37-7/8, up 5/8 on the day. After-hours trading was halted for news Thursday evening, then the stock fell to 33-1/2 in early evening trading, down 4-3/8 from the Thursday close.
Gillette first started warning of fourth quarter problems Sept. 28, when it said that it expected to make the 32 cent third quarter estimate, but would see a 1 percent decrease in sales. At that time it would not confirm the estimates for the fourth quarter that were then as high as 44 cents. Those estimates had dropped to 42 cents by Thursday. The company now looks positioned to make about 32 to 33 cents a share, diluted, in the fourth quarter, assuming roughly the same number of shares.
In the 1998 third quarter the company had net income of $353 million before a one-time realignment charge reduced net income by $347 million.
As warned last month, 1999 third quarter sales were $2.5 billion, a 1 percent decline from last year.
For year-to-date the company had net income of $921 million, or 82 cents a share diluted, down 7.2 percent from the $993 million, or 86 cents a share it posted in the period a year ago before the restructuring charge. Revenue for the period fell 0.3 percent to $6.8 billion.
The company said its board authorized an additional 25 million shares to its existing 75 million share repurchase program, with shares to be bought on the open market over the next two years. .
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Gillette Co.
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