Procter & Gamble shows raising prices is not the cure all for companies facing higher costs
Procter & Gamble always sheds good light on its battle with inflation. The consumer goods company beat on both the top and bottom lines as stronger volumes, good product mix, and to an extent price hikes helped Q1 results. But don't be fooled – price hikes can only go so far in covering inflation. Some perspective from the company: Gross margin fell 3.7 percentage points (YOY) in the quarter. Commodity cost inflation made up almost all of that gross margin decline (3.5 percentage points) Higher transportation costs reduced margins by another 0.5 percentage points. Price hikes had a positive impact of 0.5 percentage points on gross margin As evident from the above points, price hikes only covered the increase in freight costs, while commodity costs were a hefty blow to P & G's margins. The company had to rely on some "productivity savings" to cushion its margins – but that wasn't nearly enough to make up for all the commodity cost pressures. P & G shares were last down about 1.6% on Tuesday and are now flat for the year. Rising costs ruin chance to raise forecast The company also said that it's raising its fiscal year forecast for commodity and freight inflation. Having just completed its first quarter, it now expects a headwind of $2.3 billion for the year. That's a 21% increase from the $1.9 billion headwind it forecasted 3 months ago. All in all, commodity & freight cost inflation will pull down full-year earnings by 90 cents per share. If it weren't for the huge inflation issues, full-year earnings would be about 15% higher than the company's current EPS forecast. One final point – despite those heightened headwinds, P & G's financial guidance isn't bad. It's maintaining its revenue outlook and organic sales forecast. But oddly, it's also keeping its EPS forecast – even amid all the heightened inflation pressures. While higher prices are inevitable, they don't seem strong enough for the company to raise sales guidance. At the same time, demand seems to be stable too since the organic sales outlook didn't change. So how does the earnings outlook also stay the same under these conditions? Perhaps P & G will rely tremendously on operational efficiencies to sustain its profit levels amid this inflationary environment.

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