One of the allures of owning stock in a company like Procter & Gamble (PG -3.53%) is that it sells things that people buy on a regular basis. While that consistency makes the business resilient, it isn't immune to the normal ups and downs of the economic cycle.
However, right now it looks like Procter & Gamble is executing so well that people might start to believe it can sidestep the next downturn. Here's a look at what's going right, and why it probably won't last forever.
An incredible string of results
In the first quarter of fiscal 2022 (from July to September 2021), consumer staples giant Procter & Gamble was able to increase organic sales by 4% via a mixture of increased prices (two percentage points), increased volume (one percentage point), and consumer shift toward higher-margin products (one percentage point). That's pretty much the best of all worlds and was a feat that the company repeated in the fiscal second quarter (from October to December 2021), with organic growth up 6%, this time largely driven by higher prices and increased volume.
But that wasn't the end of the streak, as the fiscal 2022 third quarter (from January to March) witnessed organic sales increase a huge 10%. This time volume accounted for three percentage points, consumers shifting to higher cost items added two percentage points, and the rest, a full five percentage points, was from price hikes.
The only reasonable reaction to this string of successful quarters is, well -- wow! P&G is, without a doubt, firing on all cylinders right now.
What's really notable, however, is that it has been able to do this in the face of fast-rising inflation. Essentially, even as consumers are facing materially rising costs, they are still willing to shell out more for P&G products, while at the same time increasing their consumption of those products. The company generally sits at the high end of the sector cost-wise, with products that attempt to differentiate themselves by offering notable quality improvements over those of the competition. So perhaps that's part of the reason for the incredible performance run. And yet trees don't grow to the sky.
Preparing investors for the inevitable
The interesting thing here is that the company is likely to end fiscal 2022 (in June) on a strong note too, wrapping up a great year. That's because the price increases it has initiated will continue to benefit results, and so far consumers haven't blinked. In the industry they call this price elasticity, or basically how willing consumers are to accept price increases. According to Procter & Gamble management, price elasticity has been, across the board, better than expected.
Still, management is clear to state that it is closely monitoring the impact of its price increases. And it isn't simply pushing through price hikes willy-nilly -- it is being more surgical, often pairing price increases with product enhancements. The goal here is to justify the price change. What P&G is doing is obviously working -- all brands, low-cost and high-cost, are raising prices. Ultimately, the company isn't working in a vacuum, and there's some wiggle room when everyone is hiking prices.
But management noted several times during its quarterly conference call that it is closely monitoring elasticities. Further, it highlighted that the company doesn't need to make price adjustments all at once or quickly, even though it intends to improve margins over time. Essentially, the clear warning to shareholders is that when P&G starts to see consumer buying trends weaken it could sacrifice margins to protect market share. Or, to put it more directly, it will stop raising prices if people aren't willing to pay more for its products. This isn't an "if" issue because eventually, consumers will start to balk at higher prices and P&G will have to adjust.
It's going great for now
Procter & Gamble clearly has the right strategy for the current market, which is proven out in its incredibly strong sales results. Long-term investors, however, have to remember that the world goes in cycles. Indeed, it wasn't all that long ago that P&G was floundering, seemingly unable to do anything right. There have been material changes since that time, but today's good times won't last forever any more than the bad times did. And since management is already looking for the turn, you should be prepared for it, too -- when, not if, it comes.