Why Procter & Gamble’s Margins Are Expected to Expand

Productivity initiatives are on track

Through its recent productivity initiatives, Procter & Gamble (PG) has embarked on a restructuring plan that aims to reduce costs and generate healthy margins. The company’s initiatives involve streamlining its operations, reducing overhead, and enhancing the effectiveness of its marketing spending. It intends to generate about $10 billion in cost savings over the next five years, which should enable the company to fund its growth initiatives, lower costs, and boost profitability.

Procter & Gamble’s restructuring initiatives are moving in line with its expectation, thereby helping it generate superior margins. As the chart below shows, the company’s productivity initiatives are well on track.

Why Procter & Gamble’s Margins Are Expected to Expand

It remained successful in reducing costs by overhauling its manufacturing and distribution system. Through December 2016, Procter & Gamble reduced the non-manufacturing enrollment by ~26%. The company plans to reduce non-manufacturing roles by 25%–30% by the end of this fiscal year.

Margins are expected to rise

During the last reported quarter (fiscal 2Q17 ended December 31, 2016), Procter & Gamble witnessed an 80-basis-point improvement in its gross margin, thanks to the 210-basis-point positive impact from manufacturing cost savings, lower restructuring charges, and higher volumes.

However, the negative impact from currency fluctuations, lower prices, higher commodity costs, and an unfavorable product mix partially offset the margin expansion. Meanwhile, the company’s operating margin rose 20 basis points to 23.0% in fiscal 2Q17.

The larger picture

By comparison, Clorox’s (CLX) gross margin rose ten basis points during the company’s last reported quarter, while it expanded 180 basis points and 95 basis points for Colgate-Palmolive (CL) and Kimberly-Clark (KMB), respectively.

With its continued focus on improving sales and reducing costs, Procter & Gamble is expected to report healthy margins in coming quarters. However, macro headwinds, adverse currency movement, and its lower pricing on account of increased competition are likely to remain a drag.

Notably, ETF investors looking for exposure to Procter & Gamble can consider the Fidelity MSCI Consumer Staples Index ETF (FSTA), which invests 11.2% of its portfolio in the company.