Analyst Note| Erin Lash, CFA |
In the face of well-defined challenges (namely, rampant cost pressures and supply chain constraints), wide-moat Procter & Gamble served up a solid start to the fiscal year. Organic sales edged up 4% in the first quarter (on top of 9% marks in the year-ago period), reflecting a balanced contribution from higher prices, favorable mix, and increased volumes. Gross and operating margins contracted to the tune of 370 and 260 basis points, respectively, to 49% and 24.7%. But we attribute this erosion in profits to higher commodities, which were a 350-basis-point hit to gross margins in the period, as well as increased transportation costs, which served as an incremental 50-basis-point drag. Although these pressures look unlikely to abate--the company ramped up its full-year expectations for the combination of commodities and freight to total a $2.3 billion headwind in fiscal 2022, from its $1.9 billion outlook less than three months ago--we continue to believe that P&G will employ a multi-pronged approach to combating these issues, including passing through a portion of these higher costs to consumers, while also pursuing additional productivity initiatives, which we view as prudent. And despite current inflationary headwinds, we’re encouraged that management’s rhetoric continues to stress the crucial nature of brand investments.