Foreign exchange and cost headwinds to hurt
Procter & Gamble (PG) announced price increases across several product categories aimed at offsetting the adverse impact from the foreign exchange rate and continued inflation in commodities. However, we expect the company’s margins to remain weak and continue to slide, at least in the near term.
Procter & Gamble’s management expects the negative impact from commodities and foreign exchange rates to worsen during the second quarter, which in turn is likely to hurt margins. Also, the benefits from increased pricing are expected to support margins in the second half of fiscal 2019.
In the near term, higher raw material prices, increased transportation costs, and adverse currency rates are projected to hurt its profit margins. Also, increased competition could remain a drag.
The graph above shows that Procter & Gamble’s core gross margins have deteriorated quarter-over-quarter with the rate of decline increasing sequentially. During the last reported quarter, Procter & Gamble’s core gross margin contracted 150 basis points to 49.4% as the benefit of 170 basis points from productivity savings was more than offset by the negative impact of 100 basis points from higher commodity costs, 60 basis points from adverse currency rates, and 160 basis points from the unfavorable mix.
In comparison, the company’s peers also continue to disappoint on the margins front. During the last reported quarter, Kimberly-Clark (KMB), Colgate-Palmolive (CL), Clorox (CLX), and Church & Dwight (CHD) reported YoY declines of 250 basis points, 120 basis points, 150 basis points, and 100 basis points, respectively, in their gross margin rate.
Moreover, the margins of these household and personal care product manufacturers are expected to remain weak in the coming quarters, reflecting higher input and transportation costs coupled with adverse currency rates.