No preannouncement news is good news from Club holding Procter & Gamble (PG) after two consumer-focused companies, McCormick (MKC) and Newell Brands (NWL), announced profit warnings around their presentations at the Barclays Global Consumer Staples Conference this week. P & G Chief Financial Officer Andre Schulten spoke at the Barclays conference Thursday and addressed some Wall Street concerns we wrote about pertaining to meeting full-year guidance. He said that $6 billion of inflation, foreign exchange and transportation headwinds “hurts over the last year and expect it for this fiscal year.” He added, however, “We’re well set up to deal with it within the guidance range we’ve given.” Schulten drilled down further on the muted impact of consumers trading down and buying cheaper products due to decades-high inflation, supply chain and transportation cost improvements, and the still-troublesome strong dollar. Here’s a look at what he said and what we think at the Club as shareholders in P & G. Consumers not trading down Schulten said he doesn’t see anything “structural” changing as consumers continue to choose P & G brands over less expensive brands when faced with rising prices. “We don’t see huge element of trade down where we are challenged from a share perspective,” he explained. Market share across the company’s products is “stable to growing, so all of that is working as we intend,” he added. Two reasons that P & G cites are innovation and value. The CFO said, for example, “Laundry detergent with fabric enhancers provides great value to the trade, great value to the consumer and we drive regimen trial. That regimen trial expands the market leads to repeat. So, for us, that’s a core strategy instead of going on single liquid merch, we drive regimen.” Schulten said that communicating what differentiates P & G offerings is critical as the company competes on price with “the peer group in every market around the world.” Transportation costs easing “We see some good news on commodity input costs sequentially. So that’s a little bit of help versus the numbers that we’re underlying our guidance,” Schulten said. “Transportation in the U.S. is easing a little bit. So, the load-to-driver ratio has come down. It’s reflected in lower spot rates, which starts to translate into contract rates. So that’s a little bit of effect rates. So that’s a little bit of help.” In fiscal fourth-quarter 2022 results reported in July, P & G projected higher commodity and freight costs could pressure growth. Easing transportation costs helps with supply chain interruptions due to such issues as short-term volume growth outpacing the company’s ability to add logistical capacity fast enough, Schulten said. “In the mid-term, we see our supply chain as a strategic vector that we need to continue to strengthen. It’s a vector of superiority and like everything in our concept of superiority, it has to be dynamic,” he added. While promising more about supply chain innovation at the company’s Investor Day in November, Schulten spoke Thursday about digitizing and automating process through the use of data. “We have to really drive further efficiency, but also available capacity within the supply chain, that’s the next part of the journey.” Strong dollar pressures Despite easing commodity and transportation costs, the U.S. dollar remains a headwind to the overall business. Remember, multinational companies can feel some pain from a strong dollar in their sales growth since goods abroad become more expensive. Also, when corporations convert sales in foreign currencies back into dollars, they are getting a worse rate. This hurts profits. The good news is that pressures from the strengthening U.S. dollar are being offset by those aforementioned declining commodity and transportation costs. But in a fast-moving market, things can change quickly in either direction. “The biggest driver is foreign exchange with the U.S. dollar strengthening month over month, day over day. The net is the total exposure that was underlying our guidance is still about the same. We’re still looking at $3.3 billion to $3.4 billion of net headwinds. The composition changes every day,” he said. Bottom line One of the reasons why we like P & G is for its ability to demonstrate durable pricing power. While saying consumer trade down is not a big problem, the CFO explained how the company is striking a balance between providing better pricing for inflation-pinched shoppers while staying competitive in the industry. That shows the company is mindful of the pain many Americans are feeling when it comes to grocery store sticker shock. In our Tuesday commentary, we mentioned declining commodity costs and easing dollar pressures as things that could help P & G. We were encouraged to hear Schulten talk about commodity costs coming down and supply-chain relief. While he did not quite say that the currency headaches are getting better, he did say that the total net impact from the combination of these headwinds is no worse of a problem now than when the company reported its latest quarter in July. Taken as a whole, the CFO’s comments largely reinforced our belief that P & G’s defensive nature in tough economic times can win the day and help provide a recession-resilient haven for our portfolio. We have P & G rated as a 1, meaning we see the stock as a buy as these levels. We’ve mentioned in the past that we’re trying to decide at what level it makes sense to add more P & G. We bought some on July 29 at $139 per share, but our lowest buy was around $133 per share on June 14 . The stock on Thursday was only trading about $4 below that level. (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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Source: Business - cnbc.com
