P&G Shares Fall as Price Cuts Eat Into Margins

Procter & Gamble on Tuesday reported better-than-expected quarterly sales and profit but its shares fell 3% amid investor concerns over a decline in gross margins.

The world’s largest consumer goods maker has been cutting prices in its grooming business to boost Gillette sales against cheaper competitors like Unilever’s Dollar Shave Club. The strategy, as Reuters reports, has increased volume growth but eaten into into profits and headline revenue from one of P&G’s biggest businesses.

For the second quarter, total sales rose 3% to $17.4 billion and organic sales were up 2%. But grooming segment organic sales were down 3% as shave care sales fell in the mid-single digits.

Net income fell to $2.50 billion, or 93 cents per share, compared with $7.88 billion, or $2.88 per share. Excluding items, P&G earned $1.19 per share, including a 5 cent benefit from the recent tax overhaul.

Analysts had expected earnings of $1.14 per share, but the results underwhelmed Wall Street as investors focused on a drop in gross margin of 80 basis points. In trading Tuesday, P&G shares fell 3.07% to $89.05.

“Second quarter was not a quality beat, with gross margin lower than expected, and little near-term benefit from the Tax Act,” Wells Fargo analyst Bonnie Herzog wrote in a note.

Stifel analyst Mark Astrachan said the results were “slightly disappointing, given in line sales and the lower quality EPS beat. We believe this suggests underlying fundamentals remain challenged, with productivity initiatives more than offset by investment, mix, and commodity costs.”

After P&G slashed razor prices, the company’s pricing power sank to its lowest level in 13 years. Lower prices were a 1% drag on overall second-quarter sales and a 4% drag for grooming unit revenues.

For full-year 2018, the company is maintaining its guidance for organic sales growth in the range of 2% to 3%. In the second quarter, “We accelerated organic sales growth and delivered strong productivity cost savings and cash flow,” CEO David Taylor said in a news release. “We remain on track to achieve our fiscal year objectives.”