Procter & Gamble (PG -0.78%) is a giant in the consumer staples space, with a global portfolio of industry-leading brands and a huge $360 billion market capitalization. The company has long relied on innovation to drive growth in its business and in the categories it serves, which helps to keep it at the top of the industry.
And the second quarter of P&G's fiscal 2024 was another good one, but there were two wrinkles that investors need to understand.
P&G had a good quarter, mostly
In the second quarter of P&G's fiscal 2024, sales rose 3% year over year. That may sound like a modest number, and it is, but it is a good showing for a consumer staples company. Slow and steady is the normal pace. The big boost across the company's five main businesses came from price increases, which increased sales by 4 percentage points. The big negative in the quarter was the impact of foreign exchange rates, which cost the company 1 percentage point.
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Notably, despite price increases, volume was flat overall. This is important because P&G, like all consumer staples companies, has been increasing prices at a fairly rapid clip over the past year or so to offset the impact of inflation on its own business. Effectively, it has passed its rising costs on to consumers. While there's nothing unusual about this tactic, the price hikes were larger and more frequent this time around. The normal reaction from consumers is to buy less when prices rise. So P&G being able to maintain volume across its portfolio even as it increases prices (again) was really good news.
There were some nuances to the quarter, like Chinese customers boycotting Japanese brands such as P&G SK-II cosmetics. The company expects this to be temporary. But there was also a non-cash charge that needs to be examined.
What exactly did P&G Earn?
On an adjusted basis, P&G's earnings rose 16% year over year. But on a generally accepted accounting principles (GAAP) basis, the company's earnings fell 12%. That's a big difference and it is worth examining why the difference exists. Basically, the company's adjusted numbers pulled out items it believes are one-time in nature. The big one in the quarter was a $1.3 billion before-tax impairment of the carrying value of Gillette. As the company explained in its latest quarterly report:
The impairment charge arose from a reduction in the estimated fair value of the Gillette indefinite-lived intangible asset due to a higher discount rate, weakening of several currencies relative to the U.S. dollar and the impact of the non-core restructuring program described above. This impairment charge adjusted the carrying value of the Gillette indefinite-lived intangible asset to fair value.
The non-core restructuring program noted in the comment is centered around P&G shifting from producing products within certain markets to importing products made elsewhere into the market. What exactly does all of this mean?
For starters, when a company buys another company it generally pays a premium. To simplify things, that premium gets lumped into intangible assets that are tied into things like brand names. Writing down the value of Gillette by $1.3 billion suggests that Gillette isn't worth quite as much as the company had once hoped.
That's not shocking given the changes that have taken place in the grooming space -- namely, the increasing popularity of growing a beard. Gillette also faces upstart brands offering lower-priced razors online, in stores, and via subscriptions. In fact, in 2019 the company wrote down the value of the business by $8 billion, so the most recent write down is relatively modest.
That said, the current write down suggests that the shaving market is still very competitive and Gillette just doesn't have the same dominance it once had. This is not good news, though Gillette still produces significant cash flow for P&G.
The shift from producing in a country to importing into that country is also relevant. That's a bit different from the previous approach and highlights that operating in some markets, predominantly smaller emerging economies, has been harder than P&G expected. There are good reasons for this, including difficulty in sourcing ingredients because of government-imposed monetary constraints (in plain English, P&G can't get access within the country to the U.S. dollars it needs to buy things). But, still, it means the approach management took didn't work out as planned.
Still doing well overall
The one-time items in P&G's fiscal second quarter shouldn't dissuade investors from owning the stock. It remains an industry giant with a strong business. However, it is a reminder that even industry bellwethers aren't perfect.
All in, investors should probably continue to expect headwinds for Gillette and keep an eye on emerging markets. They offer more growth opportunities, but as seen this quarter, this can come with higher risks. So while there's probably no reason to worry, you shouldn't ignore the one-off items that were effectively hidden by adjusted earnings.
