A stalwart in the household goods sector, Procter & Gamble (NYSE:PG) finally demonstrated some of its fundamental resilience when it posted an earnings beat for its fiscal first quarter. The company beat expectations on the top and bottom lines, leading to PG stock gaining 2% in the afternoon session. However, management also tamped down expectations for its fiscal year earnings, raising questions about broader pricing sustainability.
According to Barron’s, Procter & Gamble “posted earnings in the period of $1.57 a share on sales of $20.6 billion, an increase of 1% from a year earlier.” Analysts surveyed by FactSet expected the company to report “earnings of $1.54 a share on sales of $20.28 billion. A year earlier, the company posted a profit of $1.61 a share on sales of $20.34 billion.”
Still, Bloomberg noted that while revenue increased, “volume declined from a year ago — an indication that gains are being powered by higher prices to consumers.”
So far, the price hikes helped Procter & Gamble mitigate higher expenses in freight and materials. However, Bloomberg reports the earnings weren’t entirely positive news:
“But it’s now facing a stiffer challenge as enduring inflation tests consumers’ ability to absorb price increases across the economy. A stronger dollar is also making P&G’s international sales less profitable.”
While the price increases are “clearly putting pressure on volumes,” Barclays analyst Lauren Lieberman stated, “it is still a relatively muted effect.”
Though PG stock enjoyed a solid performance in the midweek session, it’s down nearly 20% year-to-date.
PG Stock Faces Longer-Term Concerns
With P&G’s decision to pass down increased costs to consumers, it managed to produce encouraging financial results this year. Nevertheless, management is under no misconceptions about strategic sustainability impacting PG stock.
CFO Andre Schulten stated it seeks a balance between higher prices and product upgrades to adjust to realities. As consumers tighten their budgets, they may no longer be able to accommodate further price spikes. “Can we stretch this equation to infinity? No. It has to be a careful balance,” he said.
Notably, the one stain on the earnings disclosure was an outlook downgrade. Per Bloomberg, the “company now sees profit toward the lower end of its forecast range of $5.81 to $6.04 in its current fiscal year due to currency effects. Foreign exchange, along with higher material and commodity costs, are seen adding an extra hit of $3.9 billion after tax this year. That’s $600 million higher than P&G’s prior guidance.”
While PG stock broadly benefits from baseline inelastic demand – that is, people will likely brush their teeth two or three times per day irrespective of economic conditions – consumers may still trade down to cheaper brands. Presumably, then, management has plenty of work ahead to figure out the right formula of pricing adjustments and consumer retention.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
