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Why Procter & Gamble Is Underperforming Broader Markets

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Near-term headwinds

As discussed in the first part of this series, Procter & Gamble (PG) stock is down about 16.8% on a YTD (year-to-date) basis as of March 26 and has underperformed most of its peers and the benchmark index.

Procter & Gamble has seen improved sales trends after reporting declines over the past several quarters. The top line increased 1.1% in fiscal 4Q17 and 3.2% in fiscal 1Q18. The company’s focus on innovation and the renovation of products, premium offerings, investments in price, and expanded distribution are driving its volumes. However, lower pricing, mainly of Gillette, amid increased competition and tighter inventory management by retailers remains a drag and is affecting its sales and margins.

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Also, a ban on the imports of finished products in Algeria and the subsidy reduction in Saudi Arabia further remains a drag. The company continues to disappoint on margins. Procter & Gamble’s margins continue to slide due to price investments to drive volumes and inflation in commodities like kerosene, propylene, and ethylene. Also, investments in innovation and brands further pressure margins growth.

In comparison, lower pricing and higher manufacturing, packaging, and logistics costs are also adversely affecting the margins of Kimberly-Clark (KMB), Colgate-Palmolive (CL), and Clorox (CLX).

Outlook

Procter & Gamble’s top line is expected to improve on a YoY basis driven by higher volumes. However, lower pricing of Gillette and macroeconomic challenges in Saudi Arabia and increased competition is likely to restrain the top-line growth rate.

Meanwhile, Procter & Gamble’s margins are expected to remain muted in the near term as investments in price, brands, and innovation and higher commodity costs are likely to hurt its margins. However, productivity savings and cost reductions are expected to supplement its margins.

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