Procter & Gamble compensates for the impact of inflation by raising selling prices
Procter & Gamble (PG) reported profit and revenue for the third quarter of fiscal year 2022, which exceeded the expectations of Wall Street analysts, as higher prices helped offset inflation and reduced margins. In the reporting period, the consumer goods giant had a lot of difficulties.
The increase in the cost of goods and freight reduced the profitability of the issuer, however, the increase in selling prices and savings on productivity helped partially offset the decline in profits. The gross margin adjusted by 4 percentage points compared to the same period last year, although the operating margin decreased by only 0.1 percentage points forecast of revenue growth for fiscal year 2022 raised, but the guidance for basic earnings per share, on the contrary, revised down.
P&G’s net income in the past quarter was $3.36 billion, or $1.33 per share (excluding onetime items), compared with $3.27 billion, or $1.26 per paper, a year earlier and a consensus from Factset at $1.28 per share. Net sales rose 7% to $19.38 billion, beating expectations of $18.73 billion.
The company’s organic revenue increased by 10%. The same indicator, but considering the impact of price changes and exchange rate fluctuations, increased by 3%. Thus, in the third quarter, 7% of organic revenue growth because of the rise in the cost of goods and positive currency revaluation compared to 6% in the last reporting period.
According to P&G CFO Andre Schulten, the company’s revenue guidance at the beginning of the year was excessively conservative, and the current price elasticity is about 20-30% better than preliminary estimates made based on data from previous years.
Healthcare became the most productive division of the company in this quarter: organic revenue growth was 16% because of strong sales of medicines to treat flu and other colds (including drugs Vicks and ZzzQuil). Another positive driver was new products to improve sleep and digestion (including Oral-B toothbrushes and Crest toothpaste).
P&G’s fabric and household goods divisions, as well as the family goods segment, reported organic sales growth of 10%. The fabric care business (including Tide detergent) saw double-digit organic revenue growth as the company raised prices and offered more premium products to customers segment of care products for children and women also received support because of higher prices, besides the growth of the market.
The self-care segment, which includes Gillette and Venus razors, reported organic sales growth of 8% beauty division (including the Panten and SK-II brands) showed the weakest organic revenue growth (+3%), also reporting a decrease in sales volumes for the quarter.
The company attributes these negative dynamics to the impact of the pandemic. The revenue guidance for the full fiscal year 2022 raised from 3 to 4% to 4-5%, it revised the benchmark for organic sales growth from 4 to 5% to 6-7%. In addition, P&G confirmed its own forecast of an increase in core earnings per share for the 2022 fiscal year, but stated that, most likely, because of the influence of inflation and currency factors, the indicator will increase only to the lower limit of the expected range of 3-6%.
We view P&G’s quarterly report as moderately positive, which is largely because of a more elastic demand for the goods produced by the company than initially expected. Excluding seasonal factors (including the outbreak of colds), as well as price increases, the net organic growth was a moderate 3%.
Gross margin continues to be under pressure because of commodity inflation and supply chain disruptions. However, the steady demand for the company’s products, despite the increase in selling prices, shows that the gross margin may recover to previous levels or even exceed them as inflation slows down and the situation in logistics chains normalizes. We maintain the target price for Procter paper & Gamble at $176.
