Procter & Gamble's strategic pricing shift should accelerate business growth this year

Published Thu, Apr 18 20244:22 PM EDT

Consumer products giant Procter & Gamble is adjusting its pricing strategy as inflation-weary shoppers are reaching 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 economic times and bad because its superior products provide consumers with more value. However, two years of a crushing inflationary cycle has taken its toll. Sales volumes have suffered due to some trade down. To remedy that dynamic, the company has said pricing won't contribute as much to revenue growth as last year's increases lap and foreign exchange and commodity costs stabilize. Less reliance on pricing "should lead to a stronger rebound in volumes, offsetting the impact to sales," said Jeff Marks, director of portfolio analysts for the CNBC Investing Club. Ultimately, "the market will reward consumer goods companies that are growing sales through improving volumes, not by raising prices," he added. Those are key items to watch out for Friday morning when P & G reports its fiscal 2024 third-quarter earnings. Shares of P & G hit a multiyear high of $163 on March 28 — less than $2 per share below all-time highs reached in late April 2022. While below those levels Thursday, P & G has still managed to gain 7.3% in 2024 — ahead of the S & P 500 's 5% advance and the consumer staples sector's roughly 3% increase. PG 5Y mountain Procter & Gamble 5 years While certainly moderating over the past year, there have been recent signs of an uptick in inflation as the economy remains strong. In turn, market expectations for Federal Reserve interest rate cuts in 2024 have been dramatically reset from six at the beginning of the year to maybe one or two currently. Jim Cramer has said the Fed has no business cutting rates anytime soon because the U.S. economy doesn't need them yet. At a high level, consumer sentiment surveys are showing Americans are getting more confident in the direction of the economy. Nik Modi, analyst at RBC Capital Markets, isn't so sure. He believes there's a disconnect between what the economic data show and how consumers feel. "Things that have inflated the most are the ones we buy every day and we tend to be more sensitive, as consumers, to that type of inflation," Modi said in an interview with CNBC. "From 2019 levels, food inflation has outpaced wage inflation, so it effectively becomes less affordable." He described the consumer staples sector overall as a "stagnant, slightly soft environment" as consumers try to stretch their dollar and search for value when they shop. Against that backdrop, Modi expects Procter to feel some of that consumer pressure, which could lead to downside on the company's organic topline. "I don't think they're going to blow the roof off in the U.S. I think there's going to be some pressure from inventories and destocking in some of their categories," but P & G should make up for it with gross margin expansion. Even in an inflationary environment, Jon Anderson, analyst at William Blair, said Procter remains relevant for a broad range of consumers. "Procter has been a share gainer through its superiority strategy, innovating across price tiers," he said, specifying not just in premium but also mid-tier and value-oriented price points. Traditionally for Procter, pricing has contributed low single digits to its earnings growth. However, over the last fiscal year, prices were abnormally high as P & G and other industry players hiked prices to offset elevated commodity costs and currency fluctuations. In fiscal 2023, Procter's pricing contributed roughly 9% to topline growth — though headwinds including the strong U.S. dollar and volume declines partially offset that, leading to 2% overall sales growth. In fiscal 2024, Anderson forecasts pricing to decrease to roughly 3% to 4% of growth. When pricing is more stable, volumes should improve because consumers are getting relief from higher prices, he reasoned. In P & G's fiscal second quarter , pricing contributed 4% to sales growth, but volumes were down on a companywide basis. During the webcast, management said they expect pricing contribution to topline growth to fall by 1 to 2 percentage points in the second half of the year, which will help offset the pressure on volume growth. Anderson projects that Procter's volumes turned positive in the March quarter and will remain so throughout the second half of the fiscal year. He expects to see a healthy organic growth rate consistent with the 4% organic growth reported in the second quarter. Given Procter's excellent execution, we believe it can continue to deliver positive volumes in North America. We bought some P & G around $156 per share and upgraded the stock to a 1 earlier this month when it was pulled lower 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, should not have been taken down that much on Ulta's woes. (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. 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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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