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Procter & Gamble’s Profit Margins Could Remain Weak

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Cost headwinds

Procter & Gamble (PG) had disappointing profit margins in the past few quarters. The second quarter probably won’t be any different. The company is focusing on productivity and cost savings, which should cushion its margins. Price increases are expected to support the margins. However, inflation in commodities, an unfavorable product mix, investments in innovation, and unfavorable currency rates are expected to more than offset the benefits and take a toll on Procter & Gamble’s core gross profit margins.

Weak gross margins will likely hurt the operating profit margins and more than offset the productivity savings stemming from overhead, agency fee, media, and advertising production costs.

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Gross margins deteriorated

The above graph shows that Procter & Gamble’s gross profit margins have remained weak. The rate of decline increased sequentially. The negative impact of inflation in commodities and negative currency rates got worse sequentially.

During the first quarter of fiscal 2019, Procter & Gamble’s core gross margin decreased by 150 basis points, which reflected a negative impact of 100 basis points from higher commodity costs and 60 basis points from negative currency rates. The unfavorable mix had a negative impact of 160 basis points. However, productivity savings contributed 170 basis points to the gross margin rate.

In comparison, Colgate-Palmolive (CL), Kimberly-Clark (KMB), Clorox (CLX), and Church & Dwight’s (CHD) profit margins also remained weak. The profit margins are projected to contract in the coming quarters. Inflation in commodities and negative currency rates could continue to impact the profit margins.

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