Consumers aren't turning away from expensive, branded consumer staples. That was the headline takeaway from Procter & Gamble's (PG 0.21%) recent earnings report, which featured the fastest organic sales growth on record for the business.
P&G's fiscal third quarter, which runs through late March, put the company on pace to beat its earlier growth outlook. Earnings are on track to meet that forecast too, despite accelerating inflation. But management made some cautious comments about growth challenges ahead as shoppers start becoming more price sensitive.
Let's dive right in.
Market share gained in several categories
Investors had high expectations heading into the report, but P&G blew past those targets. Organic sales jumped 10% to set a modern record for the massive business. Those gains came from a healthy mix of rising prices and increased sales volumes, too. P&G noted a continued demand shift toward more premium products in franchises like Tide, Olay, and Crest.
The news was even better around market share. P&G gained ground across most of its competitive brand categories. Globally, market share edged up by half of a percentage point. "We delivered another strong quarter," CEO Jon Moeller said in a press release.
Cash and profits see some pressure
The company endured pressure from rising costs. Gross profit margin dove by 4 full percentage points despite those higher prices. Yet P&G found room to cut costs in other areas so that the overall operating margin held steady.
Still, the company is facing an over $3 billion headwind from rising costs on inputs, transportation, and foreign exchange swings just in fiscal 2022. That pressure kept a lid on earnings growth in Q3 and ensured that cash flow was weaker than investors are used to seeing. Yet P&G is still leading the industry on key measures like profitability, growth, and cash generation.
The company raised its fiscal-year growth outlook while leaving its earnings forecast unchanged. That's great news for shareholders since it means P&G is on track for another strong sales year. It will likely deliver nearly $20 billion of cash to investors through dividends and stock buybacks, too.
Management noted big risks to the short-term outlook, mainly around slowing economic growth and increased price sensitivity by consumers. While shoppers gladly paid up for P&G's more premium options this past quarter, that behavior might not last long as prices rise further over the next several months.
The company has been preparing for that potential challenge by slashing costs and adding more value-focused product options. Investors won't know how well those initiatives have protected growth until reviewing the next few quarterly reports.
In the meantime, P&G appears to be on its best sales pace in recent memory. And the company has the resources and the desire to reward shareholders by sending along more cash. Those factors make P&G a compelling stock holding, even approaching a potentially weaker selling environment in the second half of 2022.