International consumer packaged-goods giant Procter & Gamble (PG +0.22%) reported fiscal 2022 second-quarter earnings on Jan. 19. The market liked what it saw, and the stock was up by 3.68% on the announcement day.
Procter & Gamble was riddled with a host of challenges arising from the coronavirus pandemic that culminated in rising costs across the board. However, P&G offset some of those expenses by raising prices. Let's look closer at the quarter's figures.
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P&G grows sales by $500 million more than expected in Q2
Net sales increased by 6% in the company's second quarter of fiscal 2022, ending on Dec. 31. At $20.95 billion, revenue in the quarter was ahead of the $20.4 billion that analysts on Wall Street were expecting.
"We delivered very strong top-line growth and made sequential progress on earnings in the face of significant cost headwinds," said President and CEO Jon Moeller. "These results keep us on track to deliver our earnings outlook and to raise estimates for sales growth, cash productivity, and cash return to shareowners."
Revenue growth was propelled equally from rising consumption of P&G's products (3%) and price increases (3%). Fabric and home care continue to be popular with consumers, as folks are still spending lots of time at home. Even though economies are reopening, millions of people are still working, learning, and entertaining at home.
Sales momentum was strong enough that management raised the target for the rest of the year. Previously, P&G guided investors to look for 2% to 4% sales growth. The new target calls for sales to grow by 4% to 5% in fiscal 2022.
Inflation will take a bigger bite out of profits
The coronavirus pandemic is creating headwinds and tailwinds for Procter & Gamble. Gross profit margin declined by 400 basis points as labor markets remained tight and the availability of materials was stretched. Understandably, fewer people are willing to work while COVID-19 is aggressively circulating. To make matters worse, a significant number of people who are working need to quarantine at home when they or a close contact test positive for the coronavirus.
The scarcity of supplies and workers is causing prices for goods and services to increase worldwide. P&G already raised the estimate of the total harm inflation will have on the company by $500 million in Q1. After completing Q2, P&G raised the figure again, saying inflation will hit profits by $300 million more. That raises the total negative impact to $2.8 billion.
Still, management is confident that the price increases it put in place will be enough to offset rising costs and reiterated its target range of 3% to 6% earnings-per-share (EPS) growth in fiscal 2022. In Q2, P&G reported EPS of $1.66, an increase of just 1% and precisely what analysts on Wall Street were expecting.
P&G expects the bulk of earnings growth to come in the second half of the year as the total weight of price increases go into effect. Whether or not consumers will absorb those increases without switching to other brands or decreasing purchases remains to be seen.
