P&G's uneventful quarter and guidance overshadows compelling execution in a tough environment

Published Thu, Jan 19 20231:59 PM ESTUpdated Wed, Mar 8 20232:00 PM EST

Club holding Procter & Gamble (PG) reported fiscal second-quarter results largely in line with expectations before the opening bell Wednesday. We like what we're seeing here and believe that underlying dynamics at the consumer staples giant point to a better quarter than the headline numbers would indicate. P & G is the consumer goods powerhouse behind Tide, Pampers, Bounty, Tampax, Gillette, Head & Shoulders, Old Spice, Dawn, Crest, Vicks and many other brands we can't live without. Sales of $20.77 billion came in slightly higher than expectations. Adjusted earnings of $1.59 per share were in line with consensus estimates. P & G did raise its sales outlook for the fiscal year, but it wasn't quite what the Street was looking for at the midpoint. Given the fact that we are seeing notable signs of economic weakness versus management's decision to incorporate current spot prices on commodities and foreign exchange rates — as it always does — we wouldn't be surprised if the team's forecast proves conservative. Bottom line While there's some concern that demand at P & G was taking a big hit due to the notable decline in overall sales volume, a factor that caused the stock to sell off initially, management addressed the issue on the post-earnings conference call. The reassuring comments eased investors' concerns about waning demand and helped the stock trim its losses. We can't say this enough, once again this demonstrates the importance of listening to the call before making knee-jerk decisions on whether to buy, sell or hold. When also factoring its pricing power, the underlying fundamentals remain very much intact, and we continue to believe that shares of this dividend aristocrat (a designation for companies that increase their dividend every year for at least 25 consecutive years) provide a safe haven during these uncertain times due to the Federal Reserve's war on inflation. P & G CEO Jon Moeller told CNBC on Thursday, in an interview from Davos, that it appears inflation is easing and pressure from a strong U.S. dollar is abating. PG YTD mountain Procter & Gamble performance Also note, P & G shares went ex-dividend Thursday, so while the stock may appear to be down on the day, about 91 cents is related to the dividend being pulled out of the share price. This will ultimately be distributed to shareholders on Feb. 15. During the December quarter, management returned roughly $4.2 billion to investors via $2 billion share repurchases and another $2.2 billion via dividends. Looking ahead, we want to see a bit more weakness before upgrading shares back to a 1 rating and before we consider repurchasing some of the shares we sold back in December at around $151 each. Guidance Management raised their fiscal year 2023 sales guidance, now expecting sales to be in a range of down 1% to in-line. That's an improvement versus prior expectations for sales to fall 1% to 3%. However, it's still below the flat to up 2% range management was targeting at the end of fiscal year 2022 — and at a midpoint of down 0.5%, it's below the unchanged level the Street was looking for. After accounting for an expected 5% foreign exchange headwind, down from the 6% headwind the company was factoring into their prior guidance, management was able to raise the low end of their organic sales forecast, now expecting growth in the range of 4% to 5%, versus a 3% to 5% range previously expected. On the bottom line, management reaffirmed EPS guidance to be in line to up 4% versus fiscal 2022 earnings of $5.81 per share, better than the 0.3% growth the Street has been modeling. However, the team did note that "given continued significant cost headwinds from commodity and materials costs and foreign exchange impacts," they're expecting results to be on the lower end of the range. Included in this forecast are expectations for a $1.2 billion after-tax foreign exchange headwind (down from $1.3 billion previously anticipated), a $2.3 billion hit due to higher commodity and material costs (down from $2.4 billion) and a $200 million impact due to higher freight costs (unchanged). Adding that up, management is factoring in a $3.7 billion, or $1.50 per share, after-tax headwind. This compares to prior guidance calling for a total headwind of $3.9 billion, or $1.57 per share, with the $200 million delta driven by commodity costs and foreign exchange dynamics. The team continues to expect adjusted free cash flow productivity of 90% and to pay around $9 billion in dividends, and to repurchase $6 billion to $8 billion of common shares in the fiscal year. Key numbers As for the full rundown of all the important numbers from the December quarter, we're trying something different with P & G's results. We made a table (see above) of the reported numbers versus estimates and how each line item compares to the year-ago quarter and the prior fiscal quarter. Here are some of the highlights: We see signs that easing commodity prices are playing into our thesis. That's because as input costs come down, profit margins can improve. This is indicated by the 10 basis point sequential improvement in the gross profit margin line-item under the Companywide numbers section, resulting from the cost of sales increasing at a slower rate sequentially than sales. Commodity prices and supply chain inflation remain a key headwind and a source of margin pressure versus the year-ago period. While seeing some relief on raw input costs, other costs remain a headwind — and as a result, we can see that higher-than-expected selling, general and administrative expenses (SG & A), in the same section of the table, continued to pressure the company's operating margin . In the Product Segments section of the table, Organic sales growth of 5% growth was achieved as a 10% increase in pricing and a 1% benefit from an improved sales mix — a greater market share of more profitable categories. It was partially offset by a 6% decline in overall sales volume, a number not represented in the table. Importantly, management addressed the decline on the conference call, saying about half of it was not consumption-related, with 1 percentage point relating to a choice to cut about 50% of its Russian portfolio and focus only on the essentials, while another 2 percentage points were "related to temporary inventory reductions" in China driven by then-Covid lockdowns as well as some inventory reduction in Europe. Management expects the Russian impact to last one more quarter before it is lapped and believes that most of the destocking dynamics are behind us. The remaining 3% hit was both consistent with what was seen in the fiscal first quarter and in line with management's expectations given the magnitude of recent price increases. The team also said that volume share is holding globally. In the U.S., the company's largest and most important market, they saw "an acceleration of volume share by 50 basis points over the past three months. The U.S. market — which passed $40 billion in annualized run rate sales last quarter for the first time ever, up from $30 billion just four years ago — remains resilient as do most enterprise markets. Geographically, the team noted that while China is slowly improving, European markets "have softened as high inflation affects consumer spending." (Jim Cramer's Charitable Trust is long PG. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Bottles of Tide detergent, a Procter & Gamble product, are displayed for sale in a pharmacy on July 30, 2020 in Los Angeles, California.

Mario Tama | Getty Images