🛒 Can P&G Expect Consumers To Keep Buying?

Twitter re-examines Musk's bid.

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🛒 P&G: The Inflation Gamble?

Consumer products giant Procter & Gamble Co. (PG) reported its biggest organic sales growth on record. However, inflation and economic uncertainty loom large in the background. It took P&G a decade to recover from one economic downturn. Can it withstand another?

Increased Prices? No problem!

Consumer prices in the US have shattered 40-year records as they climbed 7.5% in January, 7.9% in February, and 8.5% in March. The Producer Price Index ended 2021 with a reading of 9.7%, the highest calendar-year increase ever since data began to be reported in 2010. Companies such as P&G felt the impact even before the official figures were reported, owing to their proximity to consumers.

In January this year, the company informed retailers about price hikes on fabric care products like Tide and Downy dryer sheets, which took effect on February 28. Prices of some personal care products were set to be increased in the middle of this month. P&G cited higher commodity and freight costs behind the price hikes to protect their margins.

Household essentials are primarily price inelastic, and P&G’s Q3 FY2022 numbers comfortably surpassed analyst expectations as the company passed on the price increases to the consumers.

Key Highlights From Q3: 

  • Revenue: $19.38B Vs $18.73B expected
  • Earnings Per Share: $1.33 Vs $1.29 expected
  • Net Profit: $3.36B Vs $3.27B Y-o-Y

The Russia-Ukraine war impacted the company’s EPS by $0.01, and the company expects another $0.04 hit in the current quarter.

During the quarter, P&G reported 10% Y-o-Y organic sales, the biggest jump since the company began tracking the metric two decades earlier. Health Care, Fabric & Home Care, and Baby, Feminine & Family Care divisions reported double-digit organic sales growth.

The company’s healthcare business, which includes products like Vicks, Oral-B toothbrushes, ZzzQuil cold medicine, and Crest Toothpaste, was the best performing segment, with organic sales rising 16% year-on-year. The Grooming segment, which includes Gillette and Venus Razors, saw organic sales rise 8% while the beauty division underperformed.

What helped P&G is that shoppers opted for pricier products, from fragrance-free diapers to even high-end razors, instead of switching to discount alternatives.

Planning In The Face Of Headwinds

For the full fiscal 2022, P&G has raised its revenue growth forecast to 4.5% (Vs. 3.5% earlier). Even as the company increased prices, P&G also introduced lower-priced alternatives to its premium brands. For example, the Pampers diaper (which costs $0.40 apiece) now has options that cost $0.35, $0.30, and $0.20. The company hopes these steps will stave off customers finding other cheaper alternatives.

Belt-tightening from the customers may be inevitable in the coming months. If customers do end up cutting spending on staples, the company is prepared to cut costs and use the savings to invest in product improvements that’ll make its products more attractive to the customers.

For the year, P&G expects a few headwinds to push the EPS growth lower, to around 3%. These include an incremental tax of $2.5B resulting from higher commodity prices, increased freight costs of $400M, and increased foreign currency expense of $300M. These are expected to push down P&G’s EPS by $1.26 Y-o-Y.

When consumers anticipate an economic slowdown, they don’t buy, for instance, too many beauty items. P&G witnessed this firsthand, with the beauty segment’s organic sales growing only 3% while organic volumes saw a decline of 1% from the previous year. P&G has managed to get rid of most of its beauty business which it built over decades and spent billions of dollars doing so.

P&G has also indicated it may not be able to stay in business in Russia owing to sanctions, restrictions on financial institutions, supply-side challenges, and monetary controls. The company currently has 2.5K employees in Russia.

Both Russia and Ukraine contributed 1.5% to 2% of their net sales and profit. While choosing not to shut down operations in Russia completely, P&G announced that it would end all new capital investments in the country and scale down its portfolio to only basic hygiene, health, and personal care items.

P&G may believe that it is in a better position today to deal with a budget-constrained customer than earlier. But it could very well be that the record-breaking organic sales growth the company registered this quarter may just be an outlier. Shares have barely moved this year, and investors can only hope price hikes when consumers are hurting will not turn them away!

Market Reaction
PG ended at $161.25, down 0.81%.

Company Snapshot 📈

PG $161.25 -1.32 (0.81%)

Analyst Ratings (24 Analysts) BUY 58%  HOLD 38%  SELL 4%

Newsworthy 📰

Potential Deal?: Bed Bath & Beyond stock jumps on report of bids for BuyBuy Baby unit (BBBY +6.85%)

U-Turn?: Twitter re-examines Elon Musk’s bid, may be more receptive to a deal (TWTR +3.95%)

Lockdown Impact: Apple supplier Foxconn suspends production at two China factories, SCMP reports (AAPL -2.78%)

Later Today 🕒

  • The Coca-Cola Company Earnings (KO)
  • Activision Blizzard Inc. Earnings (ATVI)
  • Whirlpool Corp. Earnings (WHR)
  • Aerojet Rocketdyne Holdings Inc. Earnings (AJRD)
  • American Campus Communities Inc. (ACC)
  • Brown & Brown Inc. Earnings (BRO)
  • Calix Inc. Earnings (CALX)
  • Crown Holdings Inc. Earnings (CCK)
  • Homestreet Inc. Earnings (HMST)
  • Mandiant Inc. Earnings (MNDT)

Today’s Fun Fact

If you were to wash one load of laundry every day for a whole 52 years, you would clean the same amount as the launderette staff at Disney World wash in a single day

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