Procter & Gamble Earnings Preview: Inflationary Pressures May Hurt Sales
Reports Q1 2022 results on Tuesday, Oct. 19, before the market opens
Revenue Expectation: $19.79 billion
EPS Expectation: $1.59
Shares of global consumer staples giant Procter & Gamble (NYSE:PG) have had a great run during the pandemic.
Investors sent the stock soaring to a record high amid explosive growth in sales. But that unusual period of expansion is winding down as the global economy reopens and consumers shift their spending patterns.
In addition, the Cincinnati, Ohio-based P&G is also facing a variety of headwinds, including supply-chain disruptions and escalating costs. These factors could slow sales and hurt margins this year and the next.
The third-quarter edition of Deloitte’s CFO Signals report, which collected responses in the first half of August, stated that 44% of CFOs indicated supply disruptions have increased costs by 5% or more this year, while 32% said sales have fallen due to delays or shortages, according to Bloomberg.
In its latest update, P&G is forecasting organic sales growth of 2-4% in the company’s current fiscal year, which began in July. That’s down from the 6% advance P&G posted for the previous year—a period marked by pantry loading as consumers holed up in their homes during the start of the COVID-19 crisis.
P&G has been among the few companies that have maintained their full-year earnings guidance throughout the pandemic, benefiting from the panic-buying of toilet paper and cleaning products, as the highly contagious COVID-19 virus spread. That performance, however, will be tough to repeat.
Stock Is Still Attractive
The slowing pace of growth will be accompanied by $1.9 billion in higher expenses, after taxes, from freight and materials like pulp and resins. This, coupled with currency variation, is expected to reduce earnings per share by about $0.70 during the year, according to P&G.
These transitory factors, however, shouldn’t discourage long-term investors from taking advantage of any potential weakness in P&G shares. The company is well-positioned to deal with commodity inflation due to its strong and diversified product portfolio.
During the past five years, P&G—whose other brands include an array of household names such as Dawn dishwashing soap, Bounty paper towels and Crest toothpaste—has innovated in marketing and simplified its organizational structure.
Under Chief Executive Officer David Taylor, who next month will be replaced by Jon Moeller, P&G has cut its roster of brands from 175 to 65, focusing on the 10 product categories where margins are highest. During the course of that process, the company has also eliminated 34,000 jobs through a combination of brand sales and buyouts, as well as plant closures—slashing more than $10 billion in costs.
P&G stock, which closed at $144.42 on Friday, remains our favorite pick from among the packaged consumer goods companies. It's one of the largest dividend payers in the US—distributing $3.48 per share annual dividend for a yield of 2.4%—and with 65 years of dividend increases, it has a payout track-record that's hard to match.
We see little reason to abandon this consumer powerhouse, even if its stock goes through a rough patch in the current inflationary environment.