Here’s what affected PG’s gross margin
As expected, Procter & Gamble’s (PG) gross margins in fiscal 2Q18 were adversely impacted by higher input costs. The company’s core gross margin fell 80 basis points to 50.7% as higher input costs were further exacerbated by the recent hurricanes and the rise in crude prices took a toll on the benefits stemming from improved volumes and productivity and cost-saving measures.
The 80-basis-point decline in core gross margins reflects headwinds of 90 basis points from higher commodity prices (ethylene, propylene, kerosene among others) and 70 basis points from an adverse mix. Meanwhile, lower pricing had a negative impact of 50 basis points on its gross margins, while product reinvestments and innovation affected gross margins by 40 basis points.
How core operating margins fared
Despite lower gross margins, the company’s core operating margins fell only ten basis points to 23.4% in fiscal 2Q18. During the quarter, Procter & Gamble’s core SG&A expense rate fell 80 basis points, reflecting lower overhead costs and a decline in agency fee and ad production costs. Moreover, productivity savings added about 190 basis points to the core operating margins. Plus, higher sales positively impacted its operating margins.
Kimberly-Clark’s (KMB) 4Q17 margins also took a hit from lower pricing and higher commodity costs including pulp. Meanwhile, analysts expect margins of Colgate-Palmolive (CL) and Clorox (CLX) to remain soft owing to the inflation in commodity prices and an anticipated rise in logistics costs.
Procter & Gamble’s near-term margins are expected to remain pressured from lower Gillette pricing and higher commodity costs. However, increased productivity savings and improvement in volumes are expected to boost the company’s margins.