Procter & Gamble (PG -0.41%) just concluded a selling period for the business that was impacted by huge demand swings, soaring inflation, and massive global supply-chain challenges. Yet its revenue and earnings landed more-or-less exactly where management had forecast three months ago. P&G is also on track, executives say, to hit their wider predictions for the fiscal year that just began.
In a conference call with Wall Street analysts, CFO Andre Schulten broke down the recent results and explained why the consumer staples leader should protect its positive momentum even as it rolls out price increases across its portfolio.
Let's dive right in.
Global market share picks up
Management added context to the 4% organic sales growth figure, which marked a slowdown from the prior year's 6% spike. Almost all of P&G's 10 core product categories expanded, with fabric care being the only exception due to soaring sales gains a year ago.
The U.S. business was a standout performer. Sales rose 4% on top of last year's 16% surge. But P&G said the market-share picture was bright across the world. "We are up more than a point and a half [in global share] versus first quarter last year," Schulten said. "Consumers are continuing to prefer P&G brands."
Historic cost spikes squeeze margins
P&G's famously efficient business became even leaner this quarter. Executives slashed costs enough to lift operating profit margin by nearly 2 full percentage points. However, that success offset only a small piece of soaring inflation.
Higher spending on transportation, fuel, and raw materials pushed gross profit margin down by 4 percentage points. Most of that push trickled down to the bottom line so that core operating margin declined by 2.6 percentage points.
P&G raised its inflation outlook and now sees the total impact landing at $2.1 billion compared to the $1.9 billion estimate from July. But executives aren't worried about any long-term hit to the business. "We think the ... strategies we've chosen, the investments we've made and the focus on executional excellence have positioned us well to manage through this volatility," Schulten said.
Price increases are coming
The company is planning to roll out major price increases across most of its portfolio, which risks pushing shoppers to competing brands. P&G will be careful and deliberate with these hikes, aiming to protect market share without sacrificing too much profitability. "This is not a one-size-fits-all approach," Schulten said.
Still, higher prices should begin to lift profit margins and organic sales in Q2 and through the rest of fiscal 2022. These boosts will be amplified by several new cost-cutting initiatives that are ramping up today. "We expect pricing to be a larger contributor to sales growth in coming quarters as more of our price increases become effective in the market," according to Schulten.
It's possible that P&G will notice customers balking at the price hikes, which would force slower increases and reduced profitability. But the more likely outcome is that the company continues growing at about a 3% sales pace this year following 6% gains in each of the past two years, even as profit climbs back toward normal levels over the next several quarters.