What P&G Said about Inflation, Supply-Chain & Transportation Woes, & Trying to Keep Shelves Stocked

Profit fell despite price increases, more price increases coming to a shelf near you. “We do not anticipate any easing of costs.”

By Wolf Richter for WOLF STREET.

Procter & Gamble [PG], which makes a broad range of consumer and health-care products, released its quarterly earnings today. Let me give you the short form: Sales up some, costs up a whole bunch, profits down.

The company said that in addition to the price increases announced since April, it would implement more price increases to deal with rising costs. In its outlook, it upped the hit to earnings per share from surging commodities costs and transportation woes.

CFO Andre Schulten explained how the company had to jump through hoops, trying to keep the shelves stocked, including by limiting how much some retailers can buy to prevent hoarding. He complained about driver shortages. “We do not anticipate any easing of costs,” he said.

In April, P&G announced the first batch of price increases “in the range of mid to high single-digits,” on baby care, feminine care, and adult incontinence products, to respond to surging commodity costs and transportation costs. Later, it announced price increases on its family care, home care, and fabric care products. Over the past few weeks, it announced to US retailers price increases on its grooming, skin care, and oral care products. It has been a flow of price increases.

“The degree of timing of these moves are very specific to the category, brand, and sometimes the product form within a brand,” Schulten told analysts at the conference call this morning.

The first price increases started to show up on the shelves in September, and were barely reflected in Q1 ended September 30.

So, for the quarter ended September 30 (Q1 of its fiscal year 2022), P&G reported this morning, compared to Q1 a year ago, in a demonstration of how inflation bites (bold):

• Sales: +5%
• Costs of products sold: +13%
• So, gross profit: -2%
• Selling and admin expenses: +1%
• Operating income: -5%
• But interest expenses fell and income taxes fell
• Net earnings: -4%.

That 5% sales increase was a result of, well, mostly unrelated to selling more:

• Actual increase in volume: +2%
• Foreign exchange: +1%
• Price increases, which just started taking effect in September: +1%
• Change in mix to costlier and premium products and to the Health Care business: +1%.

Gross margin fell by a bunch. The 13% jump in costs of products sold was primarily due to surging commodity costs, transportation costs, and “product and packaging investments.”

This jump in costs ate into its gross profit, and slashed its fiscal Q1 gross margin by 3.7 percentage points year-over-year, to 49.0% (= $9.97 billion in gross profit divided by $20.34 billion in sales), from its year-ago gross margin of 52.7%.

In its outlook, P&G said that the “headwinds” from higher commodity costs and transportation costs would increase by $2.3 billion after taxes for the fiscal year 2022, up from its July estimate of an increase of $1.9 billion. The increase in commodity and transportation costs would lower its EPS for fiscal 2022 by $0.90 per share.

Price increases are going to be “a larger contributor to sales growth in coming quarters” as they become effective in the market, Schulten told analysts today.

But at what point amid these price increases are consumers going to buy less? At what point will demand get hit by these price increases?

“As this pricing reaches store shelves, we’ll be closely monitoring consumption trends,” Schulten told analysts. “Very early to read anything in terms of price elasticity. I will tell you for those price increases that have gone into the market in the U.S, most of them became effective middle of September, and we have not seen any material reaction from consumers in terms of volume offtake. So that makes us feel good about our relative position.”

Those price increases are intended to offset costs associated with commodities, supply chain woes, and transportation problems.

“In terms of supply chain dynamics, certainly demand and supply have not balanced globally as we can see,” Schulten told analysts. “We continue to see pressure on transportation and warehousing. We continue to see driver shortages, diesel increases. And as I mentioned before, across our commodity classes, whether it’s chemicals, resins, packaging, or pulp.”

“We do not anticipate any easing of costs,” Shulten told the Wall Street Journal in an interview. “We continue to see increases week after week, though at a slower pace.”

The company has to spend more to keep shelves stocked amid the supply chain and transportation chaos. “To the consumer, it looks like we’re in good supply,” Schulten said. But ensure sufficient stock of products, as consumers increasingly encounter thinly stocked shelves and shortages, the company is spending more, he said. It is enlisting backup suppliers, changing shipping routes to get around bottlenecks, reformulating products, and in some cases limiting how much any one retailer can buy at a time to avoid stockpiling, he said.

Holiday selling season is going to be a mess: Look not for what you want but for what the store has. Read... Not Getting Better: Relentless Retail Inventory Squeeze amid Shortages & Supply Chain Chaos

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Source: https://wolfstreet.com/2021/10/19/inflation-not-a-free-ride-pgs-profit-fell-despite-price-hikes-as-costs-soared-more-price-hikes-coming/