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What’s Driving Procter & Gamble’s Margin Expansion?

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Impressive rise in margins

Procter & Gamble (PG) reported a 30-basis-point rise in its gross margin in fiscal 1Q17, which ended on September 30, 2016. Its gross profit margin rose to 51.0% in fiscal 1Q17 from 50.7% in fiscal 1Q16.

The company’s core gross margin expanded 50 basis points, driven by productivity efforts and leverage on volume growth. However, the rise was offset by an unfavorable product mix, investments in capacity and innovation, and higher commodity costs.

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What drove the operating margin?

In fiscal 1Q17, Procter & Gamble’s operating margin remained flat at 22.8% compared to the prior year’s period. The core operating margin rose 20 bps (basis points), aided by the company’s productivity improvements.

The gross margin of peer Kimberly-Clark (KMB) rose 70 bps to 36.4% in 3Q16, which ended on September 30, 2016. This improvement was driven by the company’s FORCE (Focused On Reducing Costs Everywhere) cost-savings program. Its operating margin rose 170 bps to 18.2%.

Procter & Gamble and Kimberly-Clark (KMB) account for 11.1% and 2.4%, respectively, of the Fidelity MSCI Consumer Staples ETF (FSTA).

Productivity goals on track

In its 1Q17 conference call, Procter & Gamble’s CFO (chief financial officer) Jon R. Moeller talked about the company’s continued focus on productivity initiatives. In fiscal 2016, the company completed its five-year productivity program and generated $7.0 billion of savings in its cost of goods sold.

The company is also streamlining its operating structure and optimizing its head count. In the conference call, Moeller mentioned that the company has reduced its nonmanufacturing roles by one-fourth over the last five years.

The company aims to deliver $10.0 billion of cost savings over the next five years. These savings will be redirected to innovation and marketing.

In the next part, we’ll look at analyst recommendations for PG stock.

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