Why Did Procter & Gamble’s Margin Expand?

Rise in margins

Procter & Gamble (PG) reported an expansion by 80 basis points in its gross margin in fiscal 2Q17, which ended on December 31, 2016. The company’s gross profit margin rose to 50.8% in 2Q17 from 50.0% in fiscal 2Q16. The expansion in the gross margin was due to lower restructuring charges, manufacturing cost savings, and higher volume. However, these favorable factors were partially offset by currency headwinds, unfavorable product mix, higher commodity costs, and lower pricing.

Why Did Procter & Gamble’s Margin Expand?

What drove the operating margin?

In fiscal 2Q17, Procter & Gamble’s operating margin rose by 20 basis points to 23.0% compared to the same period last year. The increase was driven by the higher gross margin which offset the rise in the SG&A (selling, general, and administrative) expenses as a percentage of net sales. The rise by 60 basis points in SG&A expenses as a percentage of sales was caused by higher marketing expenses. It was partially offset by a gain from the sale of real estate.

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

Productivity goals

In the 2Q17 conference call, Procter & Gamble’s CFO Jon R. Moeller discussed the company’s continued focus on its productivity initiatives. The company is streamlining its operating structure and optimizing its headcount. Under its restructuring program, the company plans to reduce non-manufacturing roles 25%–30% by the end of this fiscal year.

The company aims to deliver ~$10 billion in cost savings over the next five years from fiscal 2017 to fiscal 2021. These savings will be redirected towards innovation and marketing.

We’ll discuss analysts’ recommendations for Procter & Gamble stock in the next part of this series.