When you hear about the global supply chain, it can be somewhat difficult to get your head around. In many respects it just means that you can't buy the stuff you want. But there's a far more acute impact for investors. Consumer goods giant Procter & Gamble (PG 0.42%) explained just how supply chain issues can hamper a business when it last reported earnings.
Hitting on almost all cylinders
When Procter & Gamble reported fiscal fourth-quarter 2022 earnings, there was a lot of good news. For example, the company's sales increased by 5%, which is huge for a consumer staples company. However, the big story was what went into that number. Procter & Gamble was able to pass on price increases while also shifting consumers into higher-cost products and, at the same time, increasing the volume of products that customers bought.
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To suggest that Procter & Gamble had a successful year would be an understatement. Shareholders should be very happy with these results, as they show that management executed at a very high level during a very difficult period. One of the key headwinds, of course, was raging inflation. Another was supply chain difficulties, which have made it hard for companies throughout the world to actually get the products they need to make the products they sell.
Despite the overall impressive results, Procter & Gamble was not immune to supply chain issues. And that's a negative that investors need to understand and watch.
Struggles both obvious and hidden
In the fiscal fourth quarter of 2022, management tagged China as a problem in three of its five divisions. This single region was clearly a key factor in the quarter's 1% sales decline. Don't underestimate how important this is to the company's overall results. Procter & Gamble highlighted solid sales growth (up 6%) in the United States and in Europe (up 7% in key markets, excluding Russia). But China's sales drop of 11% more than offset the strength in the other two regions.
The reason for most of the sales decline in China was directly tied to coronavirus-related lockdowns. For example, the shaving business in the country saw a 30% year-over-year sales decline in the quarter. Hair care and skin care were both off by double digits, with the high-end SK-II business taking a particular hit. The obvious issue is demand, since people were forced to stay home. But you can't produce and transport products and supplies if there are no workers, so demand and production were both disrupted. And now that China is opening up again, the recovery hasn't been as strong as management had expected. It isn't unreasonable to think there's a complex interaction going on between Procter & Gamble's ability to produce its products and the demand for those products.
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Key Data Points
In the United States, meanwhile, Procter & Gamble was seemingly doing exceptionally well. But when you look under that top-level performance, it has been working through supply issues in a number of divisions. Specifically, in April, May, and June the company had to reduce its advertising in its U.S. fabric care operation because it simply didn't have enough production to supply the market. Basically it couldn't stoke demand because it would have meant pushing consumers into stores that just didn't have the products being advertised. That means it gave up sales it would have otherwise made because of supply chain problems.
Although the company reports that the supply chain issues in fabric care have eased, it is still dealing with family care supply headwinds. In other words, the supply chain is a problem that isn't going away. And the worrying part is that this is happening in the company's strongly performing U.S. market.
No easy fixes
Adding capacity and getting employees back to work in regions still dealing with shutdowns are not things that get fixed overnight. They take time and, often, investment to mend. Procter & Gamble, which is a Dividend King, has proven it can handle headwinds and still reward investors well over time. So there's probably no huge worry here.
But management provided conservative guidance for fiscal 2023, which has some investors worried about the future here. That outlook, however, was largely driven by demand issues. Management noted that its projections don't factor in supply chain disruptions, even though the supply chain has remained an issue domestically and abroad. While not the only factor to watch here, further supply chain disruptions could end up being a downward shock that you'll want to watch for when listening to management discussing its quarterly earnings results. And if industry giant Procter & Gamble is dealing with such issues, you can bet that its peers are, too.
