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Earnings Outlook: P&G earnings: Sales are set to fall for the first time in 5 years as higher prices take a toll

Procter & Gamble Co. can be expected to beat expectations, as it usually does, when it reports fiscal second-quarter earnings later this week, but investors can assume that continued price increases will hurt demand more than they have in years.

The consumer packaged-goods company
PG,
-2.68%
,
whose brands include Tide, Pampers, Crest and Head & Shoulders, is slated to report results for the quarter through December on Thursday’s opening bell.

Analysts surveyed by FactSet are expecting, on average, earnings per share (EPS) to fall to $1.59 from $1.66 in the same period a year ago. Sales are forecast to decline 1.1% to $20.73 billion, which would mark the first year-over-year decline since the quarter that ended June 2017.

P&G has beaten EPS expectations 19 times over the past 20 quarters and has topped sales projections for the past 10 quarters.

A concern among Wall Street analysts is over what is referred to as price elasticity, which is how economists measure the affect of price changes on demand. Higher elasticity means that price changes have a greater effect on demand.

P&G’s products are considered consumer staples, which means they are what consumers need rather than what they want. That tends to make P&G products less price elastic when compared with consumer discretionary products.

For P&G’s fiscal first quarter, the company said sales grew 1.3%, as a 9% increase in prices offset a 3% decline in shipment volume, which was the first year-over-year drop in volume in six years. But it could have been a lot worse.

Chief Financial Officer Andre Schulten said in December that he was “positively surprised” by how little demand for P&G’s products was hurt even though the company raised prices more than its peers, according to a FactSet transcript. He said elasticities seen around the world were “significantly more favorable” than would have been expected.

But as the economy slows and inflation remains stubbornly high, Schulten said there is a “nervousness” in the consumer that he can sense across the retail environment, even for consumer staples.

“Our categories are no exception to that, so we see a return to elasticities that are more in line with what we would have expected in the first place,” Schulten said.

Basically, he expects P&G products to be more price elastic than they have been, and Wall Street appears to agree.

JPMorgan analyst Andrea Teixeira expects pricing in the latest quarter to be up 9.7%, which is more than the 9% increase of the sequential first quarter. She also expects a bigger impact on volume, which she expects to decline 4.2%, versus the 3% decline in the first quarter.

“[W]e expect elasticities to play a larger role as consumers will eventually have to make tougher choices,” Teixeira wrote in a note to clients.

She reiterated the neutral rating on P&G’s stock but raised her price target to $150 from $141.

Raymond James’ Olivia Tong also expects increased elasticity, as her estimate for sequential price growth is flat at 9%, but she expects volume declines to accelerate to 4%.

Still, Tong reiterated her outperform rating, while raising her stock-price target to $170 from $165.

Tong also raised her fiscal 2023 revenue estimate to $80.87 billion from $79.47 billion, which now represents a 0.8% increase from a year ago. That’s despite P&G saying in its first-quarter report in October that it expected 2023 sales to be down 3% to down 1% from 2022.

P&G’s stock dropped 2.7% to $146.41 on Wednesday, the lowest close since Nov. 29. It has run up 14.1% over the past three months, while the Consumer Staples Select Sector SPDR exchange-traded fund
XLP,
-2.73%

has gained 5.2% and the S&P 500
SPX,
-1.56%

has advanced 5.6%.

Here is a breakdown of what analysts expect for sales for each of P&G’s business segments:

The FactSet consensus for fabric- and home-care sales is $6.81 billion, which is down 2.2% from a year ago.

Baby-, feminine- and family-care sales are expected to fall 2.5%, to $4.99 billion.

Beauty sales are expected to be $3.86 billion, down 1.8% from a year ago.

Healthcare sales are expected to inch 0.1% lower, to $2.97 billion.

Grooming sales are seen falling 3.4%, to $1.75 billion.

Corporate sales are expected to increase by 9.0%, to $165.7 million.

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