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Why Procter & Gamble’s Margins Are Struggling

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Aug. 2 2018, Updated 8:02 a.m. ET

Cost headwinds to blame

Procter & Gamble (PG) continues to struggle on the margin front as commodity inflation, higher shipment costs, and brand investments take a toll on its profitability. The company’s peers are no better, with Kimberly-Clark (KMB), Colgate-Palmolive (CL), and the Clorox Company (CLX) also having witnessed sluggish margins over the past several quarters.

During its fiscal fourth quarter, Procter & Gamble’s core gross profit margin contracted 140 basis points to 47.9%, reflecting 110 basis points of negative impact from higher commodity prices and shipping costs. Meanwhile, unfavorable currency rates and a lower product mix had adverse effects of 40 basis points and 120 basis points, respectively, on the company’s gross margin.

Lower pricing amid heightened competition dented P&G’s core gross margin by 80 basis points. Packaging and innovation had an unfavorable impact of 60 basis points on its gross margin.

The company’s cost-saving initiatives contributed 270 basis points to its gross margin but failed to offset the negatives.

Procter & Gamble’s core operating profit margin contracted 30 basis points to 18.8% during the quarter as overhead savings partially offset its lower gross margin.

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Margin outlook

Procter & Gamble is increasing prices to offset the negative impact of higher commodity costs, which should support its margins. The company’s strong productivity savings are expected to drive its margins in the coming quarters.

Adverse currency rates and business reinvestment needs amid heightened competition and aggressive pricing from private label products are likely to hurt P&G’s gross margin in the near term.

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