Procter & Gamble Slays The Commodity Monster

By Eric Fox | August 06, 2008 AAA

Procter & Gamble (NYSE:PG) reported strong numbers on Tuesday beating estimates on earnings and revenue. It joined a narrow list of companies with the pricing power to offset increases in prices of raw materials.

Procter & Gamble reported fiscal fourth quarter revenue of $21.3 billion and earnings per share of 92 cents. The earnings contained a 12-cent-per-share tax benefit, leaving an adjusted EPS number of 80 cents. Analysts were expecting revenue of $21.1 billion and EPS of 78 cents.

It's not that P&G wasn't hit by rising commodity and energy costs (its gross margin in the quarter fell by 160 basis points to 49.2%); it's just that the company was able to raise prices to offset the problem. Specifically, P&G mitigated the original impact on gross margin of 300 basis points with price increases, cost savings projects and scale leverage from volume growth. The company also reported an impressive decline in selling, general & administrative expenses, which were down 210 basis points, to 31.1%. P&G cited cost savings from the Gillette integration, productivity gains, and scale leverage on volume increases. (Learn about margins and what they mean for stockholders in The Bottom Line On Margins and Analyzing Operating Margins.)

P&G reported volume and pricing growth in all its segments and was helped by strong currency gains in its overseas sales, as seen in the table below:

Quarterly Net Sales Information
(percent change vs. same quarter last year)
Beauty GBU Volume Currency Price Mix/
Beauty 2.0% 7.0% 2.0% 0.0% 11.0%
Grooming 3.0% 8.0% 2.0% -1.0% 12.0%
Health and Well-Being GBU
Health Care 2.0% 6.0% 1.0% -2.0% 7.0%
Snacks, Coffee
and Pet Care
1.0% 4.0% 6.0% -3.0% 8.0%
Household Care GBU
Fabric Care
and Home Care
4.0% 6.0% 4.0% -1.0% 13.0%
Baby Care
and Family Care
3.0% 6.0% 2.0% -1.0% 10.0%
- - - - - -
Company Total 3.0% 6.0% 3.0% -2.0% 10.0%

Despite the apparent good news on the pricing front, P&G management warned investors of the continuing impact of these costs, which will hit the company with $3 billion in additional commodity and energy costs in fiscal 2009. Only three months ago, P&G expected additional costs of only $2 billion.

Kimberly Clark Can't Keep Pace
Not all consumer product companies have been able to raise prices enough to weather the current spike in costs for commodities and energy. In July, rival Kimberly Clark (NYSE:KMB) reported earnings and stated during the conference call that the company would have to absorb $900 million of commodity cost increases during the year, double what it estimated at the start of the year. Tom Falk, the chairman and CEO said, "The reality is that the rapid run-up in costs has outpaced our ability to offset the impact of those costs in the near term through price increases and through other actions." Kimberly quantified the unexpected inflation in costs during the second quarter at $50 million, or 8 cents per share. (To learn how to break down and understand a company's budget, check out How Budgeting Works For Companies.)

Sharp Cost Increases at Colgate
Colgate Palmolive
(NYSE:CL) reported a few days after Kimberly Clark, and did manage to raise prices without hurting volumes. Management said it saw sharp increases in raw and packaging material costs worldwide, especially oil-related costs and agricultural commodities, but these increases were offset by increased pricing and successful savings initiatives. In its pet food business, which is 14% of company sales, the average increase in commodity costs in the U.S. over the second quarter of 2007 was 30%.

Bottom Line
Almost all industries have felt the sting of rising commodity and energy costs, but only a few have the pricing power to offset these rising costs. The recent decline in oil and other commodity prices will come as a relief to most consumers of these raw materials.

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