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Why Procter & Gamble Might Be Done Raising Prices

Motley Fool - Thu Oct 26, 2023

When Procter & Gamble (NYSE: PG) raises its prices, people notice. The company owns dozens of leading brands that consumers use daily, including laundry products, home cleaning supplies, toothpaste, and paper towels, to name just a few. Even modest price hikes in these staples can translate into significant pressure on family budgets.

But its price boosts could soon be coming to an end. P&G hinted at this shift in a recent earnings report covering the selling period that ended in late September. Let's take a closer look at the pricing outlook, and how it might impact investors' returns from here.

Keeping sales trends steady

At a glance, not much appeared to change for P&G's business through late September. Organic sales growth held steady at 7% this quarter, keeping the company on pace to expand at a roughly 5% rate for the full 2024 year. Price increases were unchanged as well, landing at 7% during the period.

Yet two green flags point to a likely end to those price hikes over the coming quarters. P&G said declining commodity costs should now lift earnings by about $800 million this year, for one, up dramatically from the late July forecast of a $400 million tailwind. Rising costs for these materials hurt earnings by over $2 billion last year, for context, and that process is reversing itself now.

Margin bounce

The other big positive is that profit margins are rising. P&G generated $5.7 billion of operating income this quarter, up 17% from the prior-year period. Gross profit margin jumped to 52% of sales from 47% and operating income expanded by 2 percentage points to over 20% of sales. Rival Kimberly-Clark's (NYSE: KMB) comparable metric is around 14% of sales. These gains confirm that price increases are combining with cost-cutting efforts to return P&G to near-record profitability. In short, the need for continued hikes is waning.

PG Operating Margin (TTM) Chart

PG Operating Margin (TTM) data by YCharts

Consumers likely won't accept much higher prices for long, either. P&G reported a second straight quarter of 1% volume declines, implying a real, if modest, cost to raising prices at a high-single-digit rate. Volumes fell the hardest in the baby care and shaving care segments, while shoppers were more willing to pay more in the healthcare, beauty, and laundry care divisions.

Looking ahead

The shifting pricing outlook promises to have a mixed impact on the business. On one hand, it's great news that P&G can take its foot off the pedal on prices in response to declining commodity costs. Yet it will also become harder to boost sales over the coming quarters when the company is relying more on volume gains to power growth.

And there is a new headwind offsetting those efficiency gains. Shifts in foreign exchange rates are on track to pressure reported earnings by $800 million this year, P&G warned investors this month, up from management's late July forecast of just $200 million of declines.

Overall, though, investors should be happy to hear this news given P&G's upgraded sales outlook for 2024. Shareholders will want to watch volume trends over the next few quarters to confirm that rebounds in that area are helping keep growth on track for the year. There's a good chance that earnings will keep jumping in that case, right along with investors' returns from holding this consumer staples stock.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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