Although Procter & Gamble's (PG 0.65%) latest quarterly results weren't quite as good as the previous ones, the consumer goods giant still found success as it could pass rising costs on to consumers. On that basis, the company reported a strong fiscal first quarter (Q1 FY2023). However, one uniformly negative change was the strength of the dollar. This headwind is likely to get worse before it gets better.
Some good and bad news
Procter & Gamble was able to increase organic sales by 7% in the just-ended fiscal first quarter of 2023. That comes after the consumer staples company was able to put up 5% sales growth in fiscal 2022. That was driven by a trifecta of success, with prices going up, volume rising, and consumers switching to higher-priced items.
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That said the underlying dynamics of growth have changed. Notably, the 7% organic sales growth in the fiscal first quarter was driven by price hikes, while volume declined. Moreover, in two of the company's five divisions, consumers shifted toward lower-priced products. In other words, Procter & Gamble is still navigating the current inflationary environment fairly well, but consumers seem to be starting to push back on the company's efforts to protect its margins.
There's nothing particularly unusual about this; it is the normal dance that companies like Procter & Gamble have to go through. Eventually, the turmoil should pass. Only now Procter & Gamble has another headwind to deal with, one that led it to lower its full-year 2023 outlook.
A strengthening dollar is an added headwind
The math is complicated, but the logic is pretty simple. Procter & Gamble is a U.S. company so it has to convert money it earns in foreign markets (in the local currency) back into U.S. dollars when it reports earnings. If the dollar is strong, like it is today, those foreign currencies convert into smaller dollar values. This was a 6 percentage point headwind to growth in the fiscal first quarter and it impacted every single division.
But the real story is that for the full year, Procter & Gamble expects this to be an ongoing problem. It is pegging that same 6 percentage point growth headwind for all of fiscal 2023. That's pretty big, with the company now hinting that earnings could end up being flat year over year.
This is no small issue, given that North America made up only around 49% of the company's sales in fiscal 2022. The rest is spread across the globe, including in Europe (21% of sales), China (10%), Asia Pacific (8%), Latin America (6%), and India, Africa, and the Middle East (6%). There's a lot of foreign currencies in the mix and many of them are weakening versus the dollar.
However, North America is a region marked by slow and steady growth. While Europe falls into that category as well, the rest of the company's foreign operations are in countries and regions that are likely to grow more quickly over time. That isn't meant to minimize the current currency headwinds, but there's a trade-off here and the long-term benefit of being in faster-growing markets is a net positive.
On top of that, the dollar is strengthening today but it could just as easily fall in value tomorrow. That would mean a reversal of the trend and foreign results would boost the company's results. Over the very long term, it's highly likely that currency movements wash out and prove not to be particularly meaningful when it comes to assessing Procter & Gamble's future outlook. But being in markets with fast-increasing demand is likely to be vital for long-term growth.
Not good but not terrible
No investor wants to hear that the company they own is facing new problems, like Procter & Gamble basically announced when it provided updated 2023 guidance. But these headwinds should be seen with perspective, especially given the company's incredible 66-year streak of annual dividend hikes (it's an elite Dividend King).
Yes, fiscal 2023 could be negatively impacted by the strong U.S. dollar, but it is still better to have the exposure to foreign markets, particularly faster-growing regions than to not have it. And this certainly isn't the first time Procter & Gamble has had to deal with currency issues. As you watch the rest of the year, remember that at some point in the future exchange rates are just as likely to be a net positive.
