International consumer packaged goods giant Procter & Gamble (NYSE:PG) is scheduled to report fiscal 2022 second-quarter earnings on Jan. 19. While sales have been increasing since the pandemic onset, Procter & Gamble (P&G) is grappling with the pressures from rising costs as economies are reopening.
The coronavirus pandemic is causing shortages of workers in all parts of the world, as fewer people are willing to work or governments aren't allowing them to work while a potentially deadly virus is still circulating aggressively. The company has already warned the market of the magnitude of harm that inflation will do to profits. Investors will be tuning in to P&G's second-quarter results next Wednesday, looking at how accurate management's predictions were.
Inflation is taking a bite out of P&G's profits
Procter & Gamble sells a host of popular products that are used at home, including Tide detergent, Bounty paper towels, and Oral-B teeth cleaning products. The coronavirus pandemic caused billions of people to spend more time at home. Unsurprisingly, this helped boost the sales of P&G products, which have a lot of brand recognition and trust among consumers. In 2020 and 2021, revenue increased by 4.8% and 7.3%, respectively. The aforementioned were the highest growth rates for P&G in the last decade.
Management expects this robust sales growth to continue in fiscal 2022. It guided to a range of 2% to 4%, and after the excellent results in the first quarter (ended Sept. 30), management said it thinks the higher end of that range is more likely. The more significant challenge for P&G will be on the cost side of things. Here's what CFO Andre Schulten said on the matter in the company's first-quarter conference call:
Input costs have continued to rise since we gave our initial outlook for the year in late July. Based on current spot prices, we now estimate a $2.1 billion after-tax commodity cost headwind in fiscal 2022. Fiscal cost -- freight costs have also continued to increase. We now expect freight and transportation costs to be an incremental $200 million after-tax headwind in fiscal '22. We will offset a portion of these higher costs with price increases and with productivity savings.
Already, in P&G's first quarter, it experienced a 400-basis-point hit to gross margins from higher prices paid for commodities and shipping. With the omicron variant creating yet another wave of rising coronavirus infection, labor and materials shortages are likely to persist at least a bit longer. Interestingly, the guidance for $2.3 billion of incremental costs due to rising inflation was before the most recent COVID-19 wave. That means there is a chance that management could revise the figure even higher when the company reports Q2 results.
What this could mean for investors
Analysts on Wall Street expect Procter & Gamble to report revenue of $20.4 billion and earnings per share (EPS) of $1.66 in Q2. If the company hits the EPS estimate on Wall Street, it could be an increase of just 1.2% from the same quarter last year.
That would be below the pace of 3% to 6% EPS growth management has guided for 2022, but it also noted that most gains would flow in the second half of the year after price increases go into effect. Investors should stay tuned and see if management changes the yearly forecast after Q2 results are announced on Wednesday.