CINCINNATI — Now that Procter & Gamble Co. has solved its revenue problem, Wall Street analysts are wondering why the company’s profit margin isn’t fatter.
Shares in the Cincinnati-based maker of Tide detergent and Gillette razors declined more than 3 percent to $102.78 in Tuesday morning trades. The closing price on Monday was up 16 percent since the start of this year.
P&G reported a $2.7 billion profit on $16.5 billion in revenue in the quarter ending March 31. Its earnings per share of $1.06 was two cents better than Wall Street analysts were expecting, while revenue was $90 million above expectations.
P&G had its best sales growth in its skin care brands, including SK-II, while laundry brands Tide and Downy continue to grow revenue with innovations including scent beads and unit dose laundry packs like Tide Pods. P&G’s diaper business continues to struggle through slower growth while it’s grooming segment suffered declining sales.
But the most surprising number was a 5 percent increase in organic sales, which measures revenue excluding foreign exchange, divestitures and other unusual events. That is P&G’s best organic-sales performance since 2011.
”This does represent significant strengthening,” Chief Financial Officer Jon Moeller told reporters in a Thursday morning call to discuss the company’s third quarter earnings. “And importantly, it’s not just one quarter. It’s the last three quarters, which have averaged over 4 percent.”
But analysts were more concerned about rising expenses, including higher-than-expected selling, general and administrative expenses – which includes costs related to P&G’s acquisition of health care brands from Merck. Goldman Sachs associate Cody Ross called P&G’s profit margin “disappointing,” given its higher-than-expected sales growth.
“What’s holding back your gross margin expansion in an environment where commodity inflation is easing, you’re passing through the price and organic sales growth has been the strongest in years?” Ross said.
Moeller said the Merck acquisition will have a positive long-term impact on profits after P&G pays for restructuring costs. And P&G would have a bigger profit margin if not for $1.4 billion in added expense from foreign exchange fluctuations, commodity price increases and tariffs.
“You just can’t look past those big drivers of margin compression. And remember, when we’re pricing to recover those costs … We’re pricing to recover the cost, not to recover the margin,” Moeller added.