Consumer products giant Procter & Gamble is adjusting its pricing strategy as inflation-weary shoppers reach their limits on how much more they can afford to pay. Wall Street is paying attention. Historically, P&G has been able to leverage its pricing power with little resistance in both good and bad economic times because its higher-quality products provide more value to consumers. However, two years of a crushing inflationary cycle have taken their toll. Sales volumes suffered due to some decline in trade. To address this dynamic, the company said prices would not contribute as much to revenue growth as last year’s increases and that foreign exchange and raw material costs were stabilizing. Less dependence on prices “should lead to a stronger rebound in volumes, offsetting the impact on sales,” said Jeff Marks, director of portfolio analysts at CNBC Investing Club. Ultimately, “the market will reward consumer goods companies that increase sales by improving volumes, not by increasing prices,” he added. These are key things to watch Friday morning when P&G reports its third-quarter fiscal 2024 results. P&G shares hit a multi-year high of $163 on March 28, less than $2 per share below all-time highs reached in late April 2022. Although below those levels on Thursday, P&G still managed to gain 7.3% in 2024 — ahead of the S&P 500’s 5% advance and rise of about 3 % of the consumer staples sector. PG 5Y Mountain Procter & Gamble 5 Year While inflation has certainly moderated over the past year, there have been recent signs of rising inflation as the economy remains strong. In turn, market expectations for Federal Reserve interest rate cuts in 2024 have been reset significantly, from six at the start of the year to perhaps one or two currently. Jim Cramer said the Fed has no plans to cut rates in the near future because the U.S. economy doesn’t need it yet. At a high level, consumer confidence surveys show that Americans are increasingly confident in the direction of the economy. Nik Modi, an analyst at RBC Capital Markets, isn’t so sure. He believes there is a disconnect between what economic data shows and what consumers feel. “The things that have inflated the most are the things that we buy every day and we tend to be more sensitive, as consumers, to that kind of inflation,” Modi said in an interview with CNBC. “Compared to 2019 levels, food inflation has outpaced wage inflation, effectively making them less affordable.” He described the consumer staples sector as a whole as a “stagnant and slightly soft environment” where consumers are trying to save money and looking for value when shopping. Against this backdrop, Modi expects Procter to feel some of the pressure from consumers, which could lead to a decline in the company’s organic revenue. “I don’t think they’re going to blow the roof in the U.S. I think there’s going to be some inventory pressure and clearance in some of their categories,” but P&G is expected to offset that with an expansion of its Gross margin. . Even in an inflationary environment, Jon Anderson, an analyst at William Blair, said Procter remained relevant to a wide range of consumers. “Procter has gained market share through its superiority strategy, innovating across all price points,” he said, specifying not only the high-end price points, but also the mid-range price points. and value-driven. Traditionally for Procter, pricing has contributed to its low-single-digit profit growth. However, during the last fiscal year, prices were unusually high as P&G and other industry players raised prices to compensate for high raw material costs and currency fluctuations. In fiscal 2023, Procter’s pricing contributed approximately 9% to revenue growth – although headwinds including the strong U.S. dollar and declining volumes partially offset this, leading to overall sales growth of 2%. In fiscal 2024, Anderson expects prices to decline to about 3 to 4 percent growth. When prices are more stable, volumes should improve because consumers receive relief from higher prices, he explained. During P&G’s fiscal second quarter, pricing contributed 4% to sales growth, but volumes were down companywide. During the webcast, management said it expects the price contribution to revenue growth to decline by 1 to 2 percentage points in the second half, which will help offset the pressure on volume growth. Anderson expects Procter’s volumes to turn positive in the March quarter and will remain positive through the second half of the fiscal year. It expects a healthy organic growth rate, in line with the 4% organic growth recorded in the second quarter. Given Procter’s excellent execution, we believe it can continue to generate positive volumes in North America. We bought P&G at around $156 per share and upgraded the stock to 1 earlier this month when it was dragged down by Ulta’s downbeat comments about the beauty category. A quality stock like Procter, which sells a whole bunch of consumer products outside of beauty, shouldn’t have been destroyed so much because of Ulta’s woes. (Jim Cramer’s Charitable Trust is long PG. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. 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A Procter & Gamble (P&G) logo is seen during the 6th China International Import Expo (CIIE) at the National Exhibition and Convention Center (Shanghai) on November 7, 2023 in Shanghai, China.
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Consumer products giant Procter & Gamble is adjusting its pricing strategy as inflation-weary buyers reach their limits on how much more they can afford to pay. Wall Street is paying attention.
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