Procter & Gamble Co. and its peers have vowed to recapture profit margins that slipped during the pandemic. Now, investors are getting a chance to gauge their progress.
The industry is projecting improvements in profitability following sharp increases in the cost of freight, labor and commodities that weighed on major North American household and personal-care companies after the pandemic broke out. Executives expect a rebound from 2022, when adjusted gross margins for five consumer-goods producers fell more than four percentage below 2019 levels — but some on Wall Street caution that the rate of progress may disappoint.
“It’ll be an expansion from a very low base, so if there is no improvement, that would be quite a bad sign,” Bloomberg Intelligence analyst Diana Gomes said.
There’s caution on Wall Street because, on top of stubbornly high expenses, the producers of toothpaste, diapers and toilet paper may not have much room to maneuver following previous price increases. There are also signs that US consumers’ resilience is fading as inflation persists and borrowing costs rise.
“It may not be a linear road to margin recovery,” said Anna Lizzul, an analyst at Bank of America Corp., referring to the industry’s path to higher profitability. “With inflation continuing, it might cause more consumers to make more difficult decisions going forward.”
P&G will post results for the first three months of 2023 before US markets open on Friday. The following week, Kimberly-Clark Corp., Church & Dwight Co. and Colgate-Palmolive Co. will report earnings, while Clorox Co. releases results on May 2.
Given the uncertain outlook, Lizzul said companies could beat expectations for the first quarter but be “hesitant to raise guidance moving forward, just because of the difficulty in forecasting how consumers will react.”
Barclays Plc analysts including Lauren Lieberman and Andrew Lazar wrote in a note to clients that household and personal-care companies’ gross margins may fall short of Wall Street expectations in the first half of the year. They anticipate that persistently high costs for labor could weigh on results, along with higher sales of lower-margin goods and investments to boost production. P&G, for example, has said it’s boosting capacity for tampons.
Worker pay has remained a key pressure. At P&G’s Iowa beauty care plant, which makes products such as Head & Shoulders shampoo, starting wages for manufacturing technicians have risen roughly 12% to $23.67 since 2020, according to a person familiar with the matter.
Ongoing Inflation
The cost of consumer goods, which includes household essentials such as soap and bleach as well as food, continues to rise faster than the general rate of inflation, according to the most recent US data from research firm NIQ. That reflects moves by companies such as P&G and Clorox, which have raised prices several times in recent quarters. NIQ estimates that shoppers are spending about 36% more on consumer-packaged goods than in 2019.
The margin recovery hinges in part on companies’ ability to persuade consumers to keep paying up. They’re launching novel goods, such as refillable disinfecting misters and toothpaste that claims to remove 15 years of stains, to justify the higher prices. At the same time, they’re touting entry-level alternatives for shoppers on tighter budgets.
There’s evidence high inflation is curbing consumption: In 2022, US unit sales of consumer-packaged goods, which track sales by item instead of by dollar value, fell 2.3%, according to NIQ. The drop from January to March this year is larger, at around 3%. Recent data from Bank of America Institute showed credit and debit usage decelerated in March to the weakest pace in two years amid slower wage growth, fewer tax refunds and the end of pandemic-era benefits. Still, the labor market remains strong.
As companies release first-quarter data, any signs of improving profitability could help lift the shares of P&G, Kimberly-Clark, Church & Dwight, Colgate and Clorox, which have collectively trailed the S&P 500 Index so far this year. Failure to show progress on rebuilding margins could cause shares to underperform further, BI’s Gomes said.
In a note to clients, Stifel Financial Corp. analyst Mark Astrachan expressed caution on home and personal-care companies into first-quarter earnings.
“While external cost pressures have generally peaked, we think group gross margin could remain pressured for another one to two quarters as company-specific costs lag commodities,” he wrote. He added that companies’ investments may partially offset improvements in profitability in the second half of the year.
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