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The Walt Disney Company: Projections
Your Name (First M. Last)
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The Walt Disney Company: Projections
Strong Financial Health and Performance
Disneyfaces manyrisks including the attractivenessof newlycreatedcharacters, intensecompetition, being overdependent on asingle region, increasingcostsof operations andemployeeretention, andchanges in technology,which could each negativelyimpact theperformanceof forecastedfinancial statements in onewayor another.For example, becauseDisneyis facingintense competition, it is likelythatDisneywill continueto investinto technological advancesbetweenFY 2019 andFY 2020 which willresult in an increasein its capital expenditures and depreciation expenses.However, considering Disney’s overallfinancial healthincludingsuccess factors of beingastrongand popular brand, committed to values and ethics, diversified, and having an effective organizationalstructure, the Companyis wellpositioned for addressingtheserisks and continuingto increaseits earningsin the future.
Readiness to Compete
Overall, Disneyis morethan readyand equipped to competein allitsbusiness environment market segments andmaintain anotable, sustainablemarket share. Disneypositions itself asa “fun, family-friendlydestination” as abasisof competitionwith its rivals(Roth, 2017). Globalization in theindustryis increasingas atrend and Disneycan honein on expansion opportunities dueto its past financial success, one ofits internal strengths. To do this, Disneyis shiftingfocus towards marketgrowth and“seekingdevelopment opportunities to take advantageof thenewfound spendingpowerof thegrowingmiddle class in Asia”(Roth, 2017). Forexample,Disney, togetherwith theHongKong government, built a 310-acreHong Kongpark with anestimated cost of $4.1 billion dollarsin 2005, however,no additional global expansions areforecasted between 2018 through2020(Roth, 2017).
Disneyis alsoconstantlycombating changingconsumertastes and preferences bydriving interest with new attractions. For example,TheWaltDisneyCompanyis currentlydesigning an immenseStarWars-themed attractionand hotelthat willopenby2021. Disneycanalsosellits products and services atahigher pricedueto its well-known popular brand.Inaddition, it holds licensingrights of its popularbrands and characterswhich enables theCompanytogenerate significant revenuefrommerchandise sales(Roth,2017).It is Disney’s brand,that enables the Companytopriceitems higher duetogreaterdemand.Itcurrentlyaccounts formorethan half of the amusement park domesticindustryrevenuewhich means that it is far ahead of its fierce competition in the United Statesand dominates in this business segment againstits competition (Roth, 2017). Although theCompanyfaces risks,itis equipped to address its weaknessesas itis built on a foundation ofstrongvalues and ethics,alonghistoryof experience, and is becoming increasinglyprofitable.In summary,reviewingDisneyfrom an internalperspective, ithas opportunities to growthrough innovation, technological advances, international expansions, and furtheracquisitions in thefuture.
Disneyis able and readytoprovideongoinginnovative entertainment to people around the world. Its mission statement is to “beoneof theworld’s leadingproducers and providers of entertainment and information … and to develop themostcreative, innovative and profitable entertainment experiences and related products inthe world” andthe Companyhas donejustthat (AbouttheWaltDisneyCompany,2018). Disneycontinues to push its limits in technological advancements and innovation byhiring Imagineers who are creative enough toimagine and deliver oneof theworld’s most sophisticated animatronics,Shaman ofSongs,amajor accomplishment that sets Disneyapartfrom its competition (Fickley-Baker, 2018). People from across thegloberecognizeits brand and want to experiencethefamilyentertainment Disney offers, whetheritbethrough books, movies, theme, parks, orcruises.
Disneyrecognizes the importanceof protectingitsintellectual propertyandstayingin compliancewith all lawsand regulations, especiallythose related to humanresources and safety. This is important becausepotential lossof income from stolen intellectualpropertycould significantlyimpact theCompany’s financial statement forecast.Thecompanyis equipped and readyto deal with change and has appropriate policies and procedures in place, includinga Standards ofBusiness Conduct, forits management and employees asaguide to handling situations that arise (Legal Standards, n.d). Also, Disneyisalsoalreadypartakingin taxplanning with therecenttaxlawchanges dueto theTaxReform and usingtaking advantageof lower tax rates to providebonus incentives and trainingopportunities to its employees.
Disneyunderstands thatsocial trends are constantlychanging and that is whyitprovides avarietyof leisureactivities for its guestson its Floridapropertylocation including golf courses, beach fronts, shopping, livemusic, and otherforms of entertainment. TheCompanytakes the time to listen to consumer feedback through surveysand other tools and make changes to improvethe overallguest experience.It hires castmembers who areproperlytrained toassist guest andanswer anyconsumer questions or concerns. Disneyhasalso been makingextraefforts to appeal to adults and older agegroups to increasethe fun and social interactions with adults as itcurrentlytargetschildren. Disneyhas also introduced the MyDisneyExperienceApp for mobile devices and MagicBands to simplifytheguest experienceso that thefocus is on creating memories. Keepingup with social lifestyle trendsincludingthe increased useof mobiledevices, for example, is just onewaythat Disneycompetes in themarket.
Lastly, from an external reviewof thecompany, Disneyis in an overallstable economic condition which means that itis experiencingincreased productivity, improved efficiencies,and low unemployment and this is an external factor thatpositivelyimpacts Disney’s workforceas wellas consumer spendingfor this financial forecast. Disneyrecognizes the economicrisks involved in its business, includingfluctuations in exchangerates for foreigncurrencies and partakes in strategic planningto prevent therisk of loss. Although adeclinein economic conditions at Disneycould adverselyaffect thedemand for anyof its businesses, reduce attendance at parksand resorts, and negativelyimpact consumer spending,Disneymonitors economic conditions andhas survivedmultiple recessions throughout its historyand is readyto tackle future economicdownturns(TheWaltDisneyCompany, 2017).
Based on the company’s financial health,readinessto compete, and abilityto addresscertain risk factors that would affect thequalityof financial statements, revenuesand earningsforecastingresults are expected toincrease at a percentage consistent to prioryears. Therefore, the correspondingexpenses areexpected to increaseat a rate that is consistent with the rate of increasein revenues and earnings.Theprojectedresults for FY 2018 through 2020arebased on averageincreasesand decreasesin historical data calculated from historicalconsolidated statements of income based forthe fiscalyears 2014 through 2017. See AppendixAwhich presents historicaldata and AppendixBwhichprojects resultsfor FY 2018 through 2020 based on the averagehistorical percentages of changeonly. No other assumptions areconsideredforthis forecastwhich means thatoperatingresults including net income are shown with the onlyassumption beingconsistencyin financial performance, which is expected.
Dueto recent availabilityof theFY 2018 third quarterand ninemonths earnings forfiscal 2018,asecond projection wasdoneusingmorerecent financial results and
more “likely” amounts which veered from theconsistencyusingahistorical projection approach and moreaccuratelydepicts themarket economy’s recent behaviors Disney’sresults(see AppendixC). This three-year likelyforecast is based on changes that theCompanyencountered forthe first threequartersof 2018 includingits acquisition ofTwenty-FirstCenturyFox, increases in interest expensedueto higher averageinterest ratesand an increasein its average debt balances, increases in capital expenditures and depreciation expense, increases in operating expenses includinglabordueto inflation and costof livingadjustments, adecreasein the effectivetaxrate dueto theTaxReform, and amoreaggressiveaverage increasein revenuethen in its most recent historicalyears.
The average projected percentage changeincreases and decreases from 2014 through2018 (theyear 2018is projected withtheyears2014 through 2017 as actual results) wereused to project 2019 and 2020resultsratherthan justhistorical figures alone as the historical data percent changes wereconservativeand did nottake anyactual results and/or current events into consideration. ConsideringthatFY 2018 projectedamountswerebased on actual results from thefirst threequarters in 2018, the projectedFY 2018 forecasted in AppendixCaremore“likely”as anaverageof thefirstthree-quarters ofactivityin FY 2018 was used asan estimatefor thefourth quarter of FY 2018. Theinformationgap in this projection of income is that usingthequarterlydata maynotbe completelyaccurate and complete as itis unaudited and could includemanagement bias. For the changein income taxrates, thequarterly averageforFY 2018wasused to determinethe income taxes forFY 2018,however, to be conservative, thelikelyprojection uses the actual24.5% effectiverate (down from 35%from the changes in taxrates fromthe TaxReform) to project income taxes forFY2019 and FY 2020, not the percentagechangein2018, as the rates significantlydecreased from 2017 to 2018 and are more accuratelydisplayed in this way.
Best and Worst Case Scenarios
Worst Case Scenario
Assumingno natural disasters orotherglobal crisis occurred, the worst-casescenario is thatDisneyexperiences less than averagegrowth ordoes not experience anygrowth at all, however with Disney’s historical track recordeven onabadyear theCompany usuallyhas somegrowth. Typically,aworst-casescenarioconsiders themost serious orsevere outcomethat mayhappen in a given situation andtakes the mostconservative approach.The worst-casescenario forDisneywould includethe assumption that ESPN+is a failure, nota success, which means that it will be more challengingforDisneywhen itlaunches its television and moviestreamingservice in 2019. Analystswillalso be keepingan eyeon Disney’s “costs given thepriceycontentdeals and ballooningbudgets of other mediacompanies in recent months”(Duggan, 2018).Disneyhasrevealed thatit willbetakinga$180million hit due to streamingserviceinvestments thisyearand this isadded as anadditional cost projected for FY2019 (Duggan, 2018).Lastly,Disneyinvestors are eagerlyanticipatingupdates on the$71.3 billion Foxdeal, which was officiallyapproved byDisneyshareholders inlateJuly2018, however, this isnotyetcomplete becauseDisneyhas not gainedglobal regulatoryapproval (Perez, 2018). According to Disney’sthird-quarterfinancial dataforFY 2018,“corporate and unallocated shared expenses increased $97 million to $196 million inthe current quarter primarilydueto costs incurred in connection with our agreement to acquireTwenty-First CenturyFox,Inc., highercompensation costsandthe timingof allocationstooperating segments” (InvestorRelations, 2018).
Theworst-casescenario is based on the averagehistoricalpercentagechangesfrom FY 2014 to 2017 (seeAppendixA).FY 2018 percent changes wereaggressivelyhigherthan historical data and thereforeexcluded from the FY 2019 projection(seeAppendixC).An additional buffer of 3 percent was added to the costs and subtracted from revenues to be conservative(SeeAppendixD). Thenew effectivetaxrate of24.5%is considered in theworst- casescenarioasthis has alreadybeen enacted dueto theTaxReformas wellas the anticipated $180 million (SeeAppendixD).
Best Case Scenario
Disney’s recentlaunch of its direct-to-consumer streamingwillbe offered in 2019; it includes content from Disney,Pixar,Lucasfilm, and Marveland willhave4-5 exclusivefeaturefilmsperyear, in addition to someoriginal series, whichis an indicator that its revenueand earningsarelikelyto continue to increasedueto this service(Disney’s Fiscal 2017 in Review, 2017).Inaddition,excludingcertain items affectingcomparability, Disney’searnings per shareforthe ninemonths ended 6/30/2018 increased 21%to $5.60 from $4.63 in the prioryear third quarter period(InvestorRelations,2018).
The company’s projectedearningsgrowth is a4.78%increasefrom 2018 to 2019 (averageearnings increaseof 10.91%from 2017 to 2021)accordingto dividend.com(Walt DisneyCompany, 2018.Accordingto Nasdaq.com, a7.79%increase is expected (WaltDisney Company, 2018&Mathews, 2018).Thebest casescenario would bethat Disney’srevenues will increasein thesame proportion as itdid from FY2017 to FY 2018 into FY2019.Therefore,for the best casescenario, thehistorical dataaveragesfrom 2014 through 2017arenot being consideredand the revenuegrowth fromFY 2017to 2018 is beingused asabest-case scenario model (seeAppendixE). FY 2018 financial data is based on actual datafrom quarters one through threewith the averageof thesequarters used as an estimateforFY2018 quarter four. Themostadvantageousgrowth rate was used as this is the ideal projected scenarioand the assumption is that management willproperlyevaluate andmonitorthe projections over timeto reachgoals and objections.However, this best-casescenario is based on unaudited information and management assumptions and therefore, is likelymoreaggressive.
Assumptions, Forecasting Methodology and Information Gaps
For theforecasts, revenues areprojected to increasewith the acquisitions of Twenty-First CenturyFox, an increased sharein BAMTech, and higheroperatingresults from its investment in ESPN. Theincreasein revenue for theprojections is pairedwith an increasein related expenses. The averagepercentage changefrom 2014 to 2018 was taken into consideration in projecting FY 2019 andFY 2020.Seethe “three-yearforecasts”previous section for details on thelikelyprojections.Analystspredict aslight bumpin revenues of2.40% from 2018 to 2019; however, after reviewingthe quarter threefinancial data, arevenueincrease of 7.6%forservicesrevenue and 1.6%for products revenuewas used takingthe first three quarters ofFY 2018’s revenueinto considerationas amorelikelyrevenueincrease, which is moreaggressive but achievable ifDisney’s earnings continuetogrow as projected(Mathews, 2018).
Oneof the assumptions is that the cost of laborwillcontinueto increase.For example, recentlyDisneyannounced that its approximately10,000 workers in Disneyland in California willbet payrate increasefrom theminimum wageof $11 to $13.25 perhour effectively immediatelyandaraise to $15 an hourwillgo into effect on January1, 2019 and $15.45 willgo into effect byJuneof 2020(Meyersohn, 2018).Theincreasein operatinglabor in 2017 was primarilydueto inflation and afullyear ofoperations at Shanghai DisneyResort(TheWalt DisneyWorld, 2017).Inflation is expected to continueto increaselabor expenses fromFY 2018 to FY 2020, which is includedin the cost of services on the consolidated income statement.
Another assumption is that therewillbe an increasein capital expenditures.Accordingto Disney’s 2017 annual report, its believethat the Company’s financial condition is strongand that its cash balances, other liquid assets, operating cash flows,access to debt and equitycapital markets and borrowingcapacity, taken together, provideadequate resources to fund ongoingoperatingrequirementsand futurecapital expenditures related to the expansion of existingbusinessesand development ofnew projects (TheWalt DisneyCompany, 2017).
Capital expenditures increased by$536 million to $3.3 billion fromJuly2017 to July2018 due to higher spendingon new attractions at its domesticparks and resorts andon technologyat BAMTech, partiallyoffset bylower spendingatHongKong DisneylandResort and Shanghai DisneyResort (InvestorRelations,2018). Disneyis also constructingthe new14-acreStarWars Galaxy’s Edgeexpansionwhich is another capitalexpenditurein processcurrentlythat willopen in 2019.
Another assumption is that therewillbeadecreaseinthe effective incometaxrate. Adecreasein theeffectiveincome taxrate will be anet favorable impact of theTaxActfor Disney.Accordingto the2018third-quarterreport, a “reduction in theCompany’s fiscal 2018 U.S. statutoryfederal income taxrate to 24.5%from 35.0%,”withouttakinginto consideration statetaxand otherrelated effects (InvestorRelations,2018). Therefore, thenew effectivetax rates wereused to projectthe income taxamounts for FY 2019and 2020.
Theforecastingmethodologyused is reasonable becauseit takes into considerationmostofthe actual financial data forFY 2018(quarters one, two, and three)to forecast FY 2018.Inaddition,the percentage changefromFY 2017 to FY 2018is considered (inaddition to the historical datafrom FY 2014 to 2017)for the averageincrease and decreasein theconsolidatedincomestatement lineitemsforthe FY 2019 and 2020 likely projections. Even thoughthe publicized results are unaudited, theseresults areused becausethey arethe mostrecentlyavailable reportswith financial data. Theprojection methodologyis in line with the company’s priorities and goals which includes developingthe “most creative innovative and profitableentertainment experiences and related products inthe world” as part of its mission statement(AbouttheWaltDisneyCompany,2018).
Information gapsincludethat the FY 2018 financial dataused is unaudited, the ambiguityof its current financial strategy,potential management bias, and not takinginto considerationthe investment of majordecisionslike an additionbusiness acquisition or globalexpansion notyet planned as of thetime ofthis projection.In addition, the assumptions madefortheseprojectionsaresubject to change based on changes to the external environment includingunforeseencircumstances. Theprojections areappropriatebecauseinternal and external factors that impact Disney’s environmentweretaken into consideration as astrategic planningtool. Althoughanalyzingthe best andworst-casescenarios helpsDisneybeproactivein futureplanningto avoid therisk and failure and protect its investments, forecastingtends to be demanding and time-consumingand is aprocess that requiresahigh levelof skills and expertise. Therefore,even though risks and assumptions areidentifiedforthis project,itis difficult to project exactlywhat will happen in thefuture andallthe possiblescenariosandprobabilitiesand likeliness of outcomes changingno matter what projection model is usedand thereareis almost alwaysgoingto be unexpected and unforeseen actual outcomesdueto information gaps or holes.
At the timeof this projection,FASBhas issued anew leaseaccountingstandard which “requires the present valueof futureoperatingleasepayments to berecorded as right-of-use lease assetsand leaseliabilities on thebalancesheet” andas of September30, 2017, the Companyhadan estimated $3.3 billion in undiscounted futureminimum lease commitments so this standard will have animpact on Disney’s futurebalancesheets.TheCompanyisstillassessingthe impact of thenewguidanceon its financial statements. Theguidanceis required to be adopted retrospectivelyandwillbe effectivebeginningin thefirst quarter ofthe Company’s 2020 fiscalyear (with earlyadoption permitted), so this has the potential ofimpactingthe 2020 balancesheet(TheWaltDisneyCompany, 2017).No assumptions weremadeforthefinancial performanceprojectionsof the consolidated statements of income as itwillimpact thebalance sheets of Disneyin thethird projectedyear only.Ifthe Companydecides toearlyadopt this accountingstandard, forecastingof thebalancesheets would need to be taken into consideration to achieveappropriatereportingaccuracy.Ifthe assumption changed in that this standard would absolutelybeearlyadopted, then this could changethe projections.
Thereis a lack ofcomparabilityin theseprojectionsbecauseDisneyevaluates the performanceof its operatingsegments based on segment operatingincome,and management uses aggregate segment operatingincome (as shown in the quarterlyfinancial reports)as a measureof theperformanceof operatingbusinesses separate from non-operating factors (InvestorRelations,2018). Theforecast is based on aggregated segment operatingincometo help assist investors byallowingthem to “evaluatechanges in theoperating resultsof the Company’s portfolio of businesses separate fromnon-operational factors that affect net income, thus providingseparate insight into both operations and the other factors that affect reported results” (InvestorRelations,2018). However, in order to takeinto consideration the risksand opportunities that relateto each operatingsegment, each segment’sactivities would haveto be evaluatedand projected separately.
AbouttheWaltDisney Company.(2018).Disney website:https://www.thewaltdisneycompany.com/about/
Fickley-Baker,J.(2018,May30). Pandora–TheWorldofAvatarTimeCapsule:ImagineersCreatetheMostAdvancedAudio-AnimatronicsFigure, theShamanofSongsforNa’viRiverJourney.Disney website:https://disneyparks.disney.go.com/blog/2018/05/pandora-the-world-of- avatar-time-capsule-imagineers-create-the-most-advanced-audio-animatronic-the-shaman-of-songs-for-navi-river-journey/
InvestorRelations.(2018, August 7). Disney website: https://www.thewaltdisneycompany.com/wp-content/uploads/2018/08/q3-fy18-earnings.pdf
Mathews, B.(2018, July25).WaltDisneyCompany: Getting Stronger onMarvel’sBack. Nasdaq website::http://www.dividend.com/news/2018/07/25/walt-disney-company-getting-stronger-on-marvels-back/
Meyersohn, N. (2018, July27).Disneyland agrees to payits workers $15 an hour. Cable NewsNetwork-AWarnerMedia Company website:https://money.cnn.com/2018/07/27/news/companies/disneyland-workers-pay-15-an-hour/index.html
Perez, S. (2018, August8).Disneymayoffer a discounted bundleof Hulu, ESPN+and its newstreaming service. Tech Crunch website:https://techcrunch.com/2018/08/08/disney-may-offer-a-discounted-bundle-of-hulu-espn-and-its-new-streaming-service/
Roth, R. (2017, December).Amusement Parks inthe US. IBISWorld IndustryReport 71311.Retrieved fromIBISWorlddatabase.
StandardsofBusiness Conduct-LegalStandards.(n.d.).TheWaltDisney Company website:https://www.thewaltdisneycompany.com/wp– content/uploads/Standards-of-Business-Conduct-Legal-Standards.pdf
Historical Four-Year Comparative Financial Performance
Three-Year Consolidated Projected Financial Performance Based on Historical Data
Three-Year Likely Consolidated Projected Financial Performance Based on Historical Data with Consideration of 2018 Quarterly Reports Data
Three-Year Likely Consolidated Projected Financial Performance Based on Historical Data with Consideration of 2018 Quarterly Reports Data (Continued)
2019 Modified Projections – Unfavorable Scenario
2019 Modified Projections – Favorable Scenario
Financial Health and Performance of Protector and Gamble
Proctor and Gamble (P&G) has not been financially performing well for last three years. The company started to record a decrease in its gross profit margin in 2017, and this trend continued till the end of 2019 when the company announced 48.6 percent as its gross profit margin. The operating profit also maintained the same trend when it reported 21.5 percent in 2017, 20.5 percent (2018) and 8.1 percent in 2019. Later on, the company experienced a regular decline in its net profit during the same period. Therefore, it is projected to maintain the same performance for coming three years. However, if the company decides to focus more on its health care segment, this change will certainly help the company improve its financial performance. Additionally, it is highly recommended that the company must invest in its health care segment for manufacturing a vaccine against the coronavirus.
Financial Performance and Health
Success Factors and Risks
The company believes and follows a growth-oriented business strategy. For example, the company’s top fifty country/category combinations show how the company’s senior management is viewing its business expansion strategy. to be very precise, in 2016, the top 50 country/category combinations retain only seventeen percent market share; in 2017, this figure touches the mark of 23 percent, 26 percent in 2018 and 33 percent in 2019 (Annual Report, 2019). A closer analysis of this situation shows the company has nearly doubled its market share in four years, clearly highlighting that the company’s management prefer to expand its market share in the chosen markets.
However, it is still worth highlighting that this market share also points out how the company is just focusing on its current local, regional, and international markets. Instead of entering into new and potential markets, the company just gives its hundred percent expansion focus to the current markets, indicating a major flaw in the strategic expansion strategy of the company.
The company follows a very effective risk management strategy, as highlighted in its annual reports and financial figures. In the context of PG’s expansion strategy, it looks reasonable to say that the company has not taken unnecessary expansion risks by entering into new markets. For companies like P&G, it would be a highly risky approach to enter into a new market without taking into account the potential return the market would deliver to the company. Therefore, to avoid taking an undue risk, the company’s management has just focused on its current markets, as doing so enables the company to minimize the possible negative effects of entering into new foreign markets.
Capitalization on Non-Financial Factors
The company uses various organizational factors for improving its financial and operational performance. For instance, “We are making organization structure and culture changes to better position us to win” (Annual Report, 2019, p xii). This direct quote hints at how the company is considering the importance of human resources for satisfying its short-term and long-term needs. In that statement, the company tries to make a strong relationship between the innovative capabilities of its human resources and its organizational success.
Additionally, if employees are given a very congenial workplace environment, this situation would enable them to put their best efforts to satisfy the expectations of their organizations (Sharma & Jyotsna, 2017; Jha and Kumar, 2016). It is in this context that P&G has given a top priority to its workplace culture, as it directly maintains a strong relationship with its organizational success.
In other words, the company has given a top priority to the importance of human resources for increasing its expansion strategy through the effective utilization of its workforce. Another example to support this analysis is that the company has hired a full-time Chief Research, Development and Innovation Officer (Kathleen B. Fish) to support and achieve its long-term strategic objectives (Annual Report, 2019).
Significant Internal Risks
The struggling net sales figure depicts a looming internal risk affecting the financial and operational performance of the company. For instance, in 2017, the company posted $65,058 million as its net sales; this figure did not increase much in 2018 when it posted $66,832 million, and $67,684 million in 2019 (Annual Report, 2019). Among other reasons, the adoption of risk-averse policy has not allowed the company to increase its sales.
Over the period of three years, the company has not been planning to enter into new foreign markets; instead, it has just focused on its existing markets. When a company avoids expanding its market share, this forces the company to rely on available or existing markets to satisfy its expectations.
The same is also happening with P&G, as it mainly focuses on its current regional and international markets. As a result, this has forced the company to experience a reduction in its net sales figure during the period. At the same time, the company’s reliance on external suppliers to provide raw materials for producing products is not allowing the company to increase its net sales (Annual Report, 2019). This shows how the company is using its internal purchasing policy to determine the quantity it purchases to produce various products for their local and international consumers.
The diminishing net profit demonstrates serious concerns about the company’s strategic business policies. For example, the company reported the net profit of 23.7 percent, 14.8 percent, and 5.9 percent in 2017, 2018, and 2019, respectively (Annual Report, 2018; Annual Report, 2019). In just three years, the company’s net profit figure dropped from double digit figure (i.e., 23.7 percent) to the single digit number (5.9 percent), indicating some worrying signs for the company and its financial policies.
In 2019, the company accounted for one line item that severely eroded its financial position and performance. The company recorded “goodwill and indefinite lived intangibles impairment charges in the amount of $8,345 million” as a part of its expenses (Annual Report, 2019). As a result, this severely affected the gross profit of the company.
In previous years (2018 and 2017), the company did not include any such expense in its financial reports. Additionally, a reduction in interest income in 2019 also negatively affected the operating profit of the company. Overall, the internal factors substantially affected the financial performance of the company.
Procter and Gamble: Projections
Procter and Gamble is likely to invest in its health and beauty business segment. Currently, its health care segment only contributes less than twelve percent to its total sales but, its beauty products is one of the more success segments of the business. Despite the fact that health care segment offers a very lucrative business and investment opportunity, Procter and Gamble has not yet moved to capitalize on this market. However, given the magnitude of coronavirus pandemic and the demand for sanitizers and house cleaners/disinfectants, it is highly likely that the company would definitely invest in it. One idea is to offer a subscription plan for consumers similar to their current subscription model for Tide Wash Club or recently acquired shaving subscription box, Billie.
As an incentive, consumers could received products at a discounted price and free shipping if they sign up for a regular subscription and delivery of the products. Both e-commerce and subscription boxes are very trendy with consumers, and this would allow P&G to have a seat at the table to compete with competitors such as Amazon who has a subscribe and save offer. In 2018 subscription boxes brought in around $7.5 billion.(Cheng,2019).It is a right time for the company to invest in its health care segment. Offering a subscription box for hand sanitizer, cleaning products and other popular home and health related products during this pandemic would be highly appropriate for the company to consider, while investing in its health care. Procter and Gamble will most likely need to invest around $50 million for research, development, and marketing.
However, since they would initially be using their current products, most of the cost could go into global marketing and manufacturing. The initial cost would be a large short term investment that would show profits long term.The investment opportunity would certainly affect the budgeting decisions of the company. The nature of the investment opportunity is of a strategic and long-term, as many competitors consider the current pandemic situation as an opportunity to generate more profit. The company’s top senior management must divert the current spending to this investment opportunity. The company has to pay if it wants to earn an abnormal return on this lucrative investment opportunity. Also, the risk is inbuilt to this type of investment decision and that would certainly affect the company’s other on-going projects. Overall, diverting financial resources from on-going projects to a new investment opportunity is a risky strategic decision that Procter and Gamble may need to take. They will also need to take into consideration a higher demand for products and make financial decisions to compensate for that. Once of the major concerns of the investment opportunity is the heavy competition. With competitors like Amazon. Procter and Gamble will need to market heavily and manage pricing to compete with the e-commerce giant. Since the idea of a “subscribe and save” feature is trendy, convenient , and cost efficient for consumers, I would wager that this business opportunity is one that Procter and Gamble should not ignore.
Annual Report, (2019). Procter and Gamble 2019 Annual Report. Retrieved from https://www.pginvestor.com/CustomPage/Index?KeyGenPage=1073748359
Annual Report, (2018). Procter and Gamble 2018 Annual Report. Retrieved from https://www.pginvestor.com/CustomPage/Index?KeyGenPage=1073748359
Dyer, D., Dalzell, F., & Olegario, R. (2004). Rising tide: Lessons from 165 years of brand building at Procter & Gamble (p. 35). Boston, MA: Harvard Business School Press
Jha,B., and Kumar, A.,(2016). Employee Engagement: A Strategic Tool to Enhance Performance. Journal for Contemporary Research in Management, July 2016, 21-29.
Kalra, A., and Ghoshal, D. (2020, April 6). ‘Don’t target doctors’: Indian medics say coronavirus critics being muzzled. Reuters. Retrieved from https://www.reuters.com/article/us-health-coronavirus-india-doctors/dont-target-doctors-indian-medics-say-coronavirus-critics-being-muzzled-idUSKBN21O1ZG
Sharma, A., & Jyotsna, B. (2017). Talent Analytics: A Strategic Tool for Talent Management Outcomes. Indian Journal of Industrial Relations, 52(3), 515-527.
Consolidated Statement of Earnings (Figure 1)
Consolidated Statement of Assets (Figure 2)
Consolidated Projections (Figure 3)
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