Procter & Gamble Once Again Reports Stellar Earnings
Q1 2024 earnings beat expectations, with strength to continue.
At the time of writing this article, I own shares of PG and it makes up a significant portion of my portfolio. This article is for entertainment purposes only, and is not meant as financial advice.
Circling Back to P&G
If you’ve been around The Simple Stock Report for any amount of time you know I rarely miss an opportunity to talk about Procter & Gamble, and with reporting their Q1 fiscal 2024 earnings this week, there is plenty to talk about. Is P&G’s success this quarter due to them rejecting my internship application (offensively quick may I add), or are they firing on all cylinders? Let’s take a look.
Dissecting Net Sales and Organic Sales Growth
P&G reported the following for their Q1 fiscal 2024:
Net Sales of $21.90 billion, beating Wall Street expectations of $21.63 billion, also beating my projections of $21.40 billion.
EPS of $1.83, beating Wall Street expectations of $1.72, also beating my projections of $1.77.
Net Sales represent year-over-year growth of +6% and organic sales growth of +7% (breakdown of these components below). EPS increased +17% versus prior year.
Pricing was a 7% benefit and Mix was a 1% benefit to Net Sales, while Volume and Foreign Exchange were both 1% headwinds. It is important to note that P&G expects this to be the last quarter with extensive pricing benefits. They expect a 3-4 percentage point drop in pricing benefit, while they expect to see improvements in volume. From the earnings call:
“And again, pricing has been a core component of our growth for 18 out of the last 19 years, so we expect that to continue. Specifically, I think the pricing will start to lap in quarter two. So you will see probably the price contribution drop to -- by 3 to 4 points in quarter two, and that was expected. And we then sequentially expect volumes to pick up and offset part of that but do expect a lower overall market growth rate for the balance of the year.” - P&G CFO Andre Schulten
It’s also important to note the geographies of net sales drivers. China was a major headwind for P&G, with volumes down significantly in China, yet organic sales still coming in at +7%. Like many other companies, P&G sees lots of uncertainty in China:
I think we said all along that we don't expect the China recovery to be quick, extensive or linear. And I think that's playing out. The business health in China is really all driven by market dynamics right now. So total market volume continues to be down. It has been down over the past few quarters between 7% and 9%. Value is down around 5% over the past few quarters, and that's the market I'm describing. So we're operating within a market that is still contracting post-COVID reopening. - P&G CFO Andre Schulten
So while there is lots of uncertainty surrounding China, I have no doubt at some point we see China begin to act as a net sales tailwind.
Moving to Europe, while primary markets in Europe have been less steady, Western European markets have been very strong for P&G:
Look, we've seen 15% organic sales growth in Europe focus markets, which is incredibly strong, a combination of 2% volume growth and strong price/mix. We have 40 basis points of share growth across the same geographies that is returning to volume growth, and that generally are positive signs. Yes, private label shares in Europe are growing. They continue to grow at about an 80 basis point clip month-over-month. But that still enables us to grow share in the same geographies. - P&G CFO Andre Schulten
My favorite point made here is P&G gaining market share in Europe along side private label. I believe this is a credit to the P&G portfolio, which truly has superior products that create greater value for consumers than private label. This has allowed them to gain market share alongside private label in Europe, instead of letting private label eat away at their market share.
Latin American sales were up 19% in the quarter, continuing a hot streak of growth in Latin America. To keep it simple, this is what Andre Schulten had to say on the call:
Look, the Latin America business is on fire.
The Latin American markets generally have high inflation which require fast acting price reactions and finding new ways to innovate to attract consumers to P&G products, and they have been successful in doing this.
Segment Performances
Beauty
Beauty segment organic sales increased 5% compared to a year ago. Skin and Personal Care sales grew low single digits driven by pricing and volume growth, but were partially offset by unfavorable mix due to slumping SK-II sales. Hair Care grew high single digits driven by price. A note here about SK-II, this is a high end brand for P&G, and is popular in their Chinese market. SK-II has struggled alongside China for some time now.
Grooming
The Grooming segment increased organic sales 9% versus a year ago, driven by higher pricing and favorable mix, partially offset by pricing-related volume declines. All regions grew organic sales for this quarter.
Health Care
Health Care organic sales increased 10% versus a year ago. Oral Care increased high single digits due to increased pricing and favorable mix. Personal Health Care organic sales increased double digits due to pricing and volume growth due to innovation and strong demand for respiratory products.
The Health Care segment’s performance is what I am most impressed with this quarter. From the call:
PHC [Personal Health Care] is doing extremely well around the world. And obviously, the seasonality here plays a key role. Going into the season, we see strong results, which is part of the strength in volumes that you see. And the last part I'll leave you with is we've invested significantly and continue to invest in strengthening our supply capability in personal healthcare, which will be needed to support that strong growth going forward. But feel good about both businesses. And yes, I think the trajectory is absolutely sustainable.
The timing of these investments into Health Care has me questioning if P&G has eyes on any acquisitions in this segment. With Kenvue recently becoming its own standalone company after being apart of Johnson & Johnson for over 100 years, I can’t help but think P&G is finding ways to bolster their health care business. Nevertheless, the strength here is something I will continue watching. I am bullish on personal health care and my thesis seems to be playing out for P&G.
Fabric and Home Care
Fabric and Home Care organic sales increased 9% versus the prior year. Fabric Care organic sales increased high single digits driven by positive pricing and mix, partially offset by volume declines in Asia. Home Care increased low teens driven by increased pricing and “favorable premium products mix”. I like to see this favorable mix in their premium products being they are higher margin. Can’t say I expect this to continue, but it is a very positive sign.
Baby, Feminine, and Family Care
Baby, Feminine, and Family Care organic sales increased 7% versus the prior year. Baby Care organic sales increased mid-single digits, driven by increased pricing and favorable product mix, partially offset by pricing-related volume declines. All geographies grew organic sales. Feminine Care increased high single digits and had the same effects as Baby Care. Family Care increased mid-single digits due to increased pricing, partially offset by unfavorable pack size mix.
I loved the strength in Health Care for P&G this past quarter, and I expect it to continue in the coming winter months. I expect the other segments to follow in Health Care’s footsteps and go volume positive in the next few quarters, as does management for P&G.
Margins
Gross profit margin came in at 52% for the quarter, up 460 basis points from a year ago. This increase was driven by a 330 basis point benefit from increased pricing, 160 points of favorable commodity costs and 150 basis points of gross productivity savings, partially offset by 60 points of negative product mix and 60 basis points of product reinvestments.
Operating income margin increased 240 basis points to 26.4% for the quarter, and 340 basis points higher on a currency-neutral basis. This improvement was primarily driven by a 210 basis point gross productivity savings.
Net profit margin increased 160 basis points to 20.7% for the quarter.
Margins were absolutely spectacular this quarter, and while this is obviously a positive for P&G, they signaled caution about reading into this too much:
And we expect some normalization of gross margin. We were certainly benefiting from a high price contribution in quarter one. And as we said, that price contribution will ease over the coming quarters. The biggest part of the commodity help, about 33% of the $800 million after-tax commodity help has materialized in quarter one. So that's a positive to gross margin relative to the balance of the year. And the foreign exchange rate headwinds will accelerate over the coming quarters. On the other hand, we will accelerate and continue to drive strong productivity. We will continue to drive trade-up and innovation. And we continue to drive every other element of productivity, not only in gross margin, but across the P&L and the balance sheet. But I want you to take away that the gross margin expansion in quarter one is very strong, but we have headwinds going into the balance of the year.
Management did not give too much color on where we should expect margins to come in at next quarter, but we do know we will get less help from commodities in the coming quarter and currencies have become an issue once again. I don’t worry about the quarter by quarter margin changes, but instead over time changes. P&G investing in productivity and seeing those savings work through is a massive benefit to the P&L, and these margin benefits are often long lasting.
Guidance
P&G widened its all-in sales growth forecast from 3-4% to 2-4% versus the prior year. This is due to foreign currency exchange now figuring to be a 1-2% headwind to all-in growth. This is no surprise if you pay attention to the strength of the US dollar, which has been getting stronger as of late. I expect many more companies to adjust their foreign exchange guidance in this coming quarter as well.
P&G still expects EPS in the range of $6.25 to $6.43 for fiscal 2024. This estimate remains unchanged despite an incremental $600 million foreign exchange headwind that was not factored in to previous guidance.
The Bottom Line
If we are successful in continuing to drive market growth, that will continue to drive sales ahead of that market growth for us while being sustainable because we create business instead of taking business from somebody else.
P&G’s quarter was everything you could have hoped for from them. They did not have many things go against them this quarter, with foreign currency exchange being the primary headwind. The growth mix moving forward will be normalizing, meaning long term growth will return back to trend. Bottom line earnings are growing faster than top line revenue, leverage investors should be thrilled to see. Outside of China, P&G is really just crushing it, and they expect to continue crushing it.
Despite this, the stock has been relatively flat since earnings, and down over 2% year-to-date. Why is P&G down if their business has been crushing it? I have two reasons. Number one being interest rates. For an income investor it has become very attractive to buy risk-free bonds yielding upwards of 5%. If you need the income and don’t want the price risk, these bonds are making stocks look unattractive. Since P&G sports a dividend yield of 2.55%, it is only rational some investors jump ship for these bond yields we haven’t seen in more than a decade.
Second is valuation. P&G is not and has not been a cheap stock. It currently trades at 22x forward earnings, down from roughly 27x forward. While I and many other investors believe P&G deserves this premium valuation, it selling off has to do with the entire consumer staples sector having a premium valuation, which it needs to trade off. I do expect this to level off moving forward, but no matter how well business is for P&G we might continue seeing pressure on its price.
Regardless of the short term movements in price, I expect P&G to keep humming right along. Recession or not, P&G has the product portfolio to keep consumers coming back. Their debt is cheap, cash flows are strong, and I have absolutely zero concerns moving forward. We’ll check back in three months from now when they report their Q2 2024 earnings.