How Procter & Gamble's (PG) Margins Will Shape Up In Q2

The Procter & Gamble Company (NYSE:PG) is set to report second-quarter fiscal 2018 results on Jan 23, before market open. This consumer goods company has been reporting weak organic sales growth along with continued market share losses for quite some time now (read more: Will New Products Lift Procter & Gamble's Q2 Sales?).

However, the company has managed to post higher earnings despite tepid sales owing to productivity and cost savings plans in order to boost margins, thereby lifting profit level.

Let’s take a look at how the company's margin is shaping up for this earnings season.

In order to counter the tepid sales growth, Procter & Gamble has been benefiting from its ongoing cost-saving program aimed at reducing costs and driving efficiency. The company has been taking various restructuring initiatives aimed at generating higher profit and lowering costs. These initiatives have helped the company to accelerate margins growth amid the slowdown in sales.

However, the company failed to expand margins in the last two reported quarters. In the last reported quarter, Procter & Gamble’s core gross margin decreased 40 basis points (bps) year over year to 51.2%, as productivity cost was more than offset by headwinds such as increased commodity costs, unfavorable geographic and product mix, and product reinvestments. Even, the company’s core operating margin decreased 40 bps year over year to 23% in the quarter, reflecting lower gross margins and higher marketing and overhead costs.

That said, the company’s focus on reducing its SG&A (selling, general, and administrative) costs and lowering its marketing and advertising spending have helped it in supporting its operating margins to some extent. Its SG&A margin decreased 10 bps and productivity savings positively impacted its profitability by 190 bps.

Overall, for the to-be-reported quarter, this Zacks Rank #3 (Hold) company’s margins are likely to remain subdued due to higher input costs that has heightened further by the recent hurricanes. The company expects higher commodity costs, including pulp, kerosene, ethylene, and propylene, to adversely impact its profitability by $300 million in fiscal 2018.

Again, unfavorable mix and lower pricing in the shave care category is likely to impact margins further. Procter & Gamble’s investing in price to drive sales of its razors and blades, due to increased competition from shave clubs, have affected its market share. Yet, productivity savings will partly offset these woes.

Procter & Gamble Company (The) Gross Margin (TTM)

Procter & Gamble Company (The) Gross Margin (TTM) | Procter & Gamble Company (The) Quote

Stocks to Consider

A few better-ranked stocks from the Zacks Consumer Staples sector are Church & Dwight Company, Inc. (NYSE:CHD) , The Clorox Company (NYSE:CLX) and Craft Brew Alliance, Inc. (NASDAQ:BREW) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Church & Dwight is expected to register 12.9% EPS growth in 2018.

Clorox has an expected EPS growth rate of 6.5% for this fiscal year.

Craft Brew is expected to witness earnings growth of 70.8% for 2018.

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