P&G Slips as Rising Costs Counter Robust Health-Care Demand

(Bloomberg) -- Procter & Gamble Co.’s brisk sales in its latest quarter weren’t enough to overcome rising commodity and freight costs that are eroding profitability.

The maker of Downy fabric softener and Puffs facial tissues announced Wednesday that it expects $2.3 billion in after-tax expenses this fiscal year from elevated commodity and freight costs -- an increase from the prior expectation of $1.9 billion. Gross margin in the company’s fiscal first quarter also fell short of expectations, outweighing organic sales and profit that beat estimates from Wall Street.

“We experienced the full impact of rising commodity and transportation costs this quarter,” Chief Financial Officer Andre Schulten said on a conference call.

P&G shares fell as much as 2.5% in New York trading, the most since May. The stock was up 2.3% this year through Monday, trailing behind the roughly 20% gain of the S&P 500 index.

While P&G is benefiting from elevated demand for household essentials during the pandemic, snarled supply chains are darkening the horizon for all consumer-goods companies. P&G has performed well in recent quarters, but investors are skeptical the company will be able to emerge unscathed from what’s expected to be a lengthy period of higher costs.

Organic sales, which strip out the impact of items like acquisitions and currency swings, grew 4% in the period ending Sept. 30. That topped analysts’ average estimate of about 2% growth. Total revenue and earnings per share also beat expectations.

Rising costs of chemicals, pulp and diesel are among the obstacles facing the Cincinnati-based company, while the transportation market is affected by a lack of drivers. Still, P&G remains optimistic in its ability to overcome the macro environment, Schulten said in an interview.

“We’ll continue to work through that,” he said. “We certainly feel well-equipped to weather this storm.”

What Bloomberg Intelligence Says

“Procter & Gamble’s cost containment and supply-chain management in fiscal 1Q ... could allow it to take market share as smaller peers struggle to match its prowess. P&G’s $2.1 billion in additional cost headwinds in fiscal 2022, raised $200 million since July, should be fully absorbed in pricing and savings.”

--Deborah Aitken, senior consumer-products analyst

Click here to read the research.

Organic sales growth in the past quarter was buoyed by the health-care unit, which increased 7%. The fabric and home-care division expanded 5% by that measure. The gains were driven by “more focus on health, hygiene and a clean home in general,” Schulten said.

P&G’s portfolio of cold and flu products, including Vicks, could get a boost during the upcoming flu season. With consumers back out in the world and inconsistent mask mandates, the situation “bodes well” for the business, Schulten said. 

“We don’t expect to fully get back to a normal incidence rate, but we expect a stronger season than what we saw last year,” he said.

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