⬆️ Is P&G Taking A Big Gamble With Price Hikes ?
P&G, Tesla, Phillip Morris and TSMC make today's headlines
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12:30 PM GMT: Initial Jobless Claims
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P&G: Worth The Gamble?
Price hikes came to Procter & Gamble's (PG) rescue yet again as volumes declined compared to last year. While quarterly results came ahead of estimates, the internals and forward guidance have little to cheer for investors. Caught at a crossroads, what will P&G eventually choose? More price hikes or customer loyalty?
Premium Much?
The demand for household goods may not have declined to an extent as that for discretionary products has. Shoppers prioritize essentials over everything else but are spending much more due to persistently high inflation.
Consumer inflation, excluding energy and food, reached a new four-decade high in September, with grocery prices rising as much as 13%.
P&G has consistently hiked prices to offset higher freight and raw materials expenses. The maker of Pampers diapers and other household essentials said that average prices across its 10 product categories rose 9% during the July-September quarter.
The move has worried retailers that they may be unable to clear overstocked shelves and are pushing back on further price hikes from the company. On its part, P&G wants them to have its products across various price points.
Grocery chains say that while P&G’s products command a certain degree of loyalty, consumers now think before every dollar they spend. For example, a tide washing power that would cost $11.99 is currently being overlooked for a version that is $2-$3 cheaper.
This has meant P&G’s volumes declined 3% during the quarter, most of that came from lower shipments to Russia. This was the second straight drop in volumes. The company, like many others, has cut back on its exposure to the country post its invasion of Ukraine. A stronger US Dollar also makes international sales less profitable. More than half of P&G’s revenue comes from overseas.
While P&G’s management says, they have successfully maintained their market leadership to a certain extent despite the inflation, their ability to control premium pricing depends on many external factors. It has resorted to more marketing spending to convince customers that paying more for products ultimately leads to saving money.
However, the company claims to have more brands in a lower range and various package sizes than it did during the global financial crisis a decade ago, in case the consumer opts for a cheaper alternative.
Dependent On Price Hikes
The numerous price hikes undertaken by P&G meant that the quarterly earnings came in above estimates. On the flip side, lower sales volumes and currency headwinds hurt profits.
Key Highlights From Q1 2023:
Revenue: $20.61B Vs $20.28B expected
Earnings Per Share: $1.57 Vs $1.54 expected
Overall sales growth stood at 1% from last year as forex headwinds hurt the topline by 6%.
P&G’s organic growth, which strips out the impact of acquisitions, divestments, and forex, increased by 7% from last year.
The company’s forecast for the full year does not inspire much. It now expects net sales to decline between 1-3%, lower than its previous outlook of flat to 2% growth. Earnings per Share (EPS) is also likely to be on the lower end of the prior outlook of flat to 4% increase.
Forex headwinds will likely hurt the company by as much as $1.3B this year, nearly $400M higher than its outlook in July.
However, the company has maintained its organic growth guidance for the year, which will be aided by price hikes, even as volumes continue to drop. Even as the cost of certain commodities declines, suppliers still charge higher prices for packaging materials and other items.
Besides earnings, the company faced a challenge from activist investors, who urged shareholders to vote against re-electing CEO Jon Moeller as chairman and instead opt for an independent chair. The environmentalists argued that P&G took insufficient action against risks related to deforestation.
However, shareholders re-elected Moeller and all its current directors, with more than 90% of the votes going in their favor. The company also added a new member to the board at its annual meeting.
Investors questioned CFO Andre Schulten on whether the company intends to increase prices. Without a definite answer, Schulten said that they are looking to “find the right equilibrium” as customers get increasingly reluctant to dip into their pockets deeper than they usually should.
Analysts believe the company has been losing market share in some of the biggest categories like detergent, paper towels & diapers. They also said that price hikes are starting to pressure volumes, although they have had a muted effect so far.
P&G’s shares are down 20% this year, and with volumes tapering off, taking more price hikes may end up being one gamble too many. The drop in volumes is enough proof that customers are starting to resist them, and the company would know that they cannot rely on brand loyalty forever. We’ll keep a close eye on which way this tide goes!
Market Reaction
PG ended at $129.56, up +0.93%.
Newsworthy 📰
Confidence: Elon Musk says Tesla is Pedal to the Metal even with a looming potential recession (TSLA -6.25%) (Premarket)
At Any Cost: Philip Morris to raise offer for Swedish Match and buy US rights for IQOS (PM +0.09%)
Risk Management: Chip maker TSMC weighs expansion in Japan to reduce geopolitical risks (TSM -0.14%)
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