On July 30, investors will get a flood of valuable data about the health of Procter & Gamble's (NYSE:PG) business. The consumer staples giant will detail the rate of its growth slowdown in the wake of COVID-19 while releasing fresh metrics on cash flow and profitability. But the biggest takeaway might be management's new outlook for the volatile fiscal year ahead that started in July and should be marked by a growth slowdown compared to pandemic highs a year ago.
Let's dive right in to the results that are set to be published later this month.
1. The slowdown is here
P&G's growth slowdown has already arrived. Organic sales gains fell to 4% in the fiscal third quarter compared to the double-digit increases that investors enjoyed through the early phases of the pandemic. Not only are consumers spending less time around the home now, but they're also working through pantry holdings that are already packed with P&G's home-care and cleaning essentials.
Most investors who follow the stock predict another sluggish growth outing in the fourth quarter, with sales rising around 3%. But keep an eye on the two-year growth metrics issued by management, which reduce the noise from the pandemic. Sales were up 10% on a two year basis last quarter and should be similarly strong this week.
P&G will also comment on its market share, which is up across key niches like fabric care and beauty supplies but down in a few diaper franchises. Contrasting its results with rival Kimberly Clark (NYSE: KMB), whose Q2 report landed on July 23rd, will help show whether the market leader continues to distance itself from peers.
2. Passing along higher costs
Both companies raised prices last year but will likely need to pass along another round of increases to consumers in 2021. Costs are spiking for most material inputs, labor, and transportation. P&G also faced pricey shipping bottlenecks in early 2021 that might have pressured sales or hurt earnings in the fourth quarter.
These issues would show up in weaker operating profit margins, but I'm not expecting any bad surprises here. P&G has a long track record of leading the industry in cash generation and profitability. That success likely continued through the close of fiscal 2021. Management's latest forecast calls for earnings to land a bit higher than the forecast it initially issued for the year.
3. The new outlook
Investors are eagerly anticipating P&G's 2022 outlook, given the huge demand swings the company has seen over the last year. Executives have hinted at a persistent growth lift as consumers continue to value home cleaning and maintenance well after the COVID threat started fading, but that's not a sure thing yet.
P&G's forecast will provide a big clue as to where business trends might settle. But the clearer signs will come from management's cash projections. The company just closed a year of massive returns, with the dividend rising by double digits and stock-buyback spending soaring. It will be interesting to see where P&G sees total returns landing after the company delivered roughly $19 billion to shareholders last year.
The ideal scenario is that the dividend giant will keep producing market-thumping cash flow that it is directed toward shareholders as profit margins rise. That's a simple but powerful formula for attractive investor returns.