Procter & Gamble (NYSE: PG) is a colossal name in the consumer staples industry, boasting a global portfolio of leading brands and a mammoth $360 billion market cap. The company’s commitment to innovation has traditionally been instrumental in propelling its business forward and maintaining its supremacy in the sector.
Following P&G’s fiscal 2024 second-quarter performance, a few critical developments have emerged that demanding investors’ attention.
Understanding P&G’s Fiscal Q2
P&G recorded a 3% year-over-year sales growth in the second quarter of fiscal 2024. Though seemingly modest, this is a commendable achievement for a company operating in the consumer staples space, where a steady, gradual pace is the norm. The rise in sales was primarily driven by a 4% increase due to price hikes but was offset by a 1% negative impact from foreign exchange rates.
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Notably, despite the price increases, overall volume remained flat. This is significant as P&G, like other consumer staples firms, has been steadily increasing prices over the past year to counter the impact of inflation. The ability to maintain sales volume amid price hikes signifies robust consumer demand, which is positive news for the company.
However, the quarter also saw challenges such as Chinese consumers boycotting Japanese brands, including P&G’s SK-II cosmetics. P&G anticipates this to be a transitory issue. Additionally, there was a non-cash charge that requires closer examination.
Examining P&G’s Earnings
On an adjusted basis, P&G’s earnings jumped 16% year over year. In stark contrast, based on generally accepted accounting principles (GAAP), the company’s earnings declined by 12%. The substantial variance warrants a detailed analysis. The disparity arises from the exclusion of items categorized as one-time in nature in the adjusted figures. The notable charge in the quarter was a $1.3 billion before-tax impairment of the carrying value of Gillette. Explaining the development, P&G stated in its quarterly report:
The impairment charge arose from a reduction in the estimated fair value of the Gillette indefinite-lived intangible asset due to a higher discount rate, weakening of several currencies relative to the U.S. dollar and the impact of the non-core restructuring program described above. This impairment charge adjusted the carrying value of the Gillette indefinite-lived intangible asset to fair value.
The mention of the non-core restructuring program underlines P&G’s transition from producing in certain markets to importing products, signifying a significant shift in its approach.
Moreover, the considerable write-down in the value of Gillette suggests the brand’s reduced eminence in the grooming market, attributable to changing trends such as the increasing popularity of beards and the emergence of rival brands offering competitively priced razors. While the recent write-down is relatively moderate compared to the 2019 $8 billion write-down, it underscores the intense competition in the shaving industry.
Furthermore, P&G’s insistence on importing products into specific markets indicates the unforeseen challenges it faced in certain emerging economies, predominantly due to operational hindrances related to sourcing ingredients and government-imposed monetary constraints.
Opacity in P&G’s Earnings Not a Cause for Alarm
While the one-time charges in P&G’s fiscal second quarter warrant thorough scrutiny, they should not deter investors from considering the stock. P&G continues to stand as a towering figure in the industry with a robust business. Nonetheless, these developments underscore that even industry titans are not immune to challenges.
Going forward, investors should anticipate ongoing headwinds for Gillette and closely monitor P&G’s performance in emerging markets, which present growth prospects but carry heightened risks, as evidenced in the recent quarter’s results. While there may not be immediate cause for concern, investors ought to remain vigilant about the isolated items concealed by adjusted earnings.
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Reuben Gregg Brewer holds positions in Procter & Gamble. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.