P&G raises full-year outlook in mixed Q3 earnings results

Procter & Gamble (PG), which produces a variety of cleaning and personal hygiene products, posted mixed fiscal third-quarter earnings on Friday. While topping earnings estimates with gains of $1.52 per share, P&G fell below its revenue estimates for the quarter.

Citi Director of Equity Research Filippo Falorni joins Yahoo Finance to discuss the larger consumer sentiment trends influencing Procter & Gamble's sales.

"Most of these companies, including Procter... have taken significant prices over the last two years to offset the big commodity inflation of really late 2021 and 2022," Falorni says. "Now, commodities have been more favorable throughout last year and this year, so there's really a lot less room for them to take implemental pricing."

For more expert insight and the latest market action, click here to watch this full episode.

This post was written by Luke Carberry Mogan.

Video transcript

SEANA SMITH: All right. Procter Gamble shares are lower this morning after its quarterly sales fell short of the Street's expectations amidst, overshadowing the company's improved outlook for a deeper dive into P&G's results. We are joined by Filippo Falorni, director of equity research at Citi. Filippo, it's great to see you. So when you take a look at the stocks reaction here shares under pressure a lot of that because of the sales miss. What does that signal just about some of the challenges ahead here for Procter Gamble.

FILIPPO FALORNI: Hi, Seana. Thanks for having me. Yeah. So look the quarter was a little bit disappointing on organic sales, which is a key metric in the space. They posted about 3% organic sales growth. The expectations were more 3 and 1/2, 3.6%. So it was a little bit of a miss. They called out some pressure points, particularly in China, which is our second largest market after the US about 10% of sales. China was down 10% in this quarter. A lot of it is due to market share challenges around their SQ2 beauty brand.

Which has been boycotted by Chinese consumer. There's been this anti-Japanese brand sentiment in China. And also in the US, which is the largest market at about 47% of sales. They called out some destocking in some particular category, particularly personal health care with a soft cold and flu season, which resulted in lower inventory levels. So there were some potential one time impacts in the quarter that should start to get a little bit better in the following quarters. But overall, organic sales results were a bit disappointing in the quarter.

BRAD SMITH: Yeah. When we look at where the prices are also increasing here. I mean, grooming prices went up 10% here in this most recent quarter. When you look across beauty, that went up 4% in this most recent quarter. I mean, it was pretty much down the board here and overall in aggregate by about 3%. How much more can companies like P&G continue to push price higher without consumers pushing back?

FILIPPO FALORNI: Yes. But that is a very good question and a very good point. Most of these companies, including Procter, most of their peers have taken significant prices over the last two years to offset the big commodity inflation of really late 2021 and 2022. Now commodities have been more favorable throughout last year and this year. So there's really a lot less room for them to take incremental pricing. A lot of the pricing that you see flowing through there is carry over pricing from the prior year.

As we think about going forward, particularly in developed markets, US and Europe. The pricing contribution is going to decelerate quite significantly. And really what's left on pricing is more the emerging markets where inflationary levels are more elevated.

SEANA SMITH: Filippo, what are you seeing just on the supply side here in terms of softer demand going back to what you were just saying there in certain regions and also just the ability to get the products to where they need to go?

FILIPPO FALORNI: Yeah. Supply chain was a big issue last year. I would say they fully resolved the big concern around supply chain and the ability really to supply product. Right now what you're seeing is like some more pressure at the consumer level in some specific markets. Overall, though I would say, there are two biggest markets. Overall, US and Europe. They're still doing well from a volume standpoint. The US volume was up 3%. European volume was up 4%.

So the consumer level has it's been pretty good, their supply chain has been resolved. There's been some pockets of pressure from a retailer destocking standpoint and China specifically that we talked about.

SEANA SMITH: Filippo, what is the timeline do you think look like for the rebound then in China the weakness that we are seeing clearly reflected in the numbers here also in the commentary that we're getting out following these results? When do you expect to see maybe that uptick? And how long will that potentially be a drag on this business as China's economy really struggles to recover?

FILIPPO FALORNI: Yeah. Sean, I mean, China's been a pressure point over the last two quarters for Procter Gamble. I think there's probably another two quarters of pressure because a lot of those pressure points really started in their fiscal Q2, which again is two quarters away from them. And a lot of it is really tied to this anti-japanese brand sentiment. The China economy has also been soft to your point. But it's really specific to the SQE2 brand.

Remember, in August of 2023, Japan announced the release of the Fukushima wastewater into the Chinese sea. And that resulted in Chinese consumers boycotting Japanese brand. SQE2, it's the biggest of Procter's brands in China and is a Japanese brand. So they're suffering significantly from market share. So there's going to be at least another two quarters until this cycle that negative impact. And then overall, the market in China has been generally softer. They've been able to do better in other categories. For example, baby diapers.

But overall to your point, the market has also been softer. That part can probably be a little bit more lingering. But for them, the boycotting impact should start to get better in two quarters.

SEANA SMITH: Filippo Floriani, director of equity research at Citi. Thanks so much for joining us here, especially on the heels of earnings and Procter Gamble stock off a little bit here in early trading action, trading just to the downside.