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Procter & Gamble’s Margins Could Remain Muted

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Dec. 4 2020, Updated 10:52 a.m. ET

Cost headwinds to offset productivity savings

Procter & Gamble (PG) has seen its margins contract in the past several quarters. The rate of decline has also increased sequentially, which doesn’t sit well with investors.

Procter & Gamble’s investment in price to drive the volume of Gillette blades and razors amid increased competition is taking a toll on organic sales and profit margins. Although the company annualized the price action taken last year to defend its market share, the margins could still contract. Inflation in key commodities and higher transportation costs are expected to more than offset the benefits from improved volumes and productivity savings.

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Colgate-Palmolive (CL), Clorox (CLX), and Kimberly-Clark (KMB) have also reported lower margins in the past several quarters, which reflects increased commodity prices and higher logistics costs. Lower net price realization due to increased competition in the value tier and tough retail environment also lowered the margins.

Recent performance and outlook

Procter & Gamble’s adjusted gross margin decreased by 110 basis points during the fiscal third quarter, while the adjusted operating margin fell by 100 basis points. The benefits from strong productivity savings contributed 230 basis points to the gross margin rate. However, lower pricing, inflation in input and transportation costs, and the negative mix more than offset the benefits.

Procter & Gamble’s management remains upbeat and expects productivity savings to drive its margins higher in coming quarters. However, margin headwinds likely won’t dissipate in the near term. Margin headwinds will likely continue to hurt the company’s profitability.

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