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P&G's strong margins take heat off annual profit forecast cut

Published 01/23/2024, 07:05 AM
Updated 01/23/2024, 12:16 PM
© Reuters. Tide detergent, a brand owned by Procter & Gamble, is seen for sale in a store in Manhattan, New York City, U.S., June 29, 2022. REUTERS/Andrew Kelly/ File Photo
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By Ananya Mariam Rajesh

(Reuters) - Procter & Gamble (NYSE:PG) cut its annual profit forecast on Tuesday to reflect a writedown in the value of its Gillette business, but the company's ability to maintain healthy margins during the second quarter pushed its shares up more than 5%.

The company's profit margins held up better than expected, analysts said, even as prices started to decline in the United States. Margins remained stronger in European markets, also helping P&G's results.

Demand for the company's daily-use products, mainly in the grooming and home-care segments, was strong, with the company's overall volumes up 4% in the United States and 3% in Europe.

This along with easing production costs and still-high prices of its products mainly in Europe helped P&G boost gross margin by 520 basis points in the second quarter.

"A much stronger margin is really a net positive for me because it provides a cushion to deliver back-half earnings given the quarter's core profit outperformance," Dave Wagner, portfolio manager at Aptus Capital Advisors, said.

However, P&G's annual profit forecast took a beating following a $1.3 billion charge, that was disclosed in December, related to a drop in the book value of its Gillette business. The company previously estimated it would record up to $2.5 billion in charges over two fiscal years due to the write-down and restructuring of certain markets.

The company now expects fiscal 2024 earnings to range from a fall of 1% to in line with fiscal 2023 earnings per share, compared with its prior forecast of a 6% to 9% growth.

P&G's overall volumes were flat in the second quarter, while average prices across product categories rose 4%.

The company's net sales rose 3.2% to $21.44 billion in the quarter, missing LSEG estimates of $21.48 billion, due to slowing demand for products including beauty brand SK-II in its second-largest market China.

In China "we see a recovery since COVID that is not linear and is somewhat bumpy," P&G CFO Andre Schulten said on a media call.

P&G's second-quarter organic sales in the country fell 15% driven by a generally slower recovery in terms of consumer sentiment, Schulten added.

© Reuters. Tide detergent, a brand owned by Procter & Gamble, is seen for sale in a store in Manhattan, New York City, U.S., June 29, 2022. REUTERS/Andrew Kelly/ File Photo

The company's core profit came in at $1.84 per share, beating estimates of $1.70.

"P&G's second-quarter earnings are a tale of two regional stories as the macroeconomic and geopolitical landscape in Greater China, APAC and the Middle East is hard to predict and led to flat volumes despite North America and focus markets in Europe growing volumes," Amanda O'Neill, lead analyst at S&P Global Ratings, said.

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