Procter & Gamble’s weak earnings report on Wednesday morning prompted us to take decisive action and exit our small remaining position. The rationale is straightforward: the results lacked compelling positives. Although we made the decision early in the day, nothing from the conference call caused us to reconsider. We were particularly relieved to have trimmed the position by one-third on Tuesday afternoon, cushioning against an earnings miss and reducing its portfolio weighting to under 1%. We have consistently emphasized since the July Monthly Meeting our goal of reducing the portfolio from 34 stocks, which raises the threshold for holding a position. P&G failed to meet that standard, just as Dover did the previous week—leading us to downgrade the industrial conglomerate to a sell-into-strength rating of three. As Jim Cramer noted on Wednesday’s Morning Meeting, this was not a quarter of mixed results; it was overwhelmingly negative.
P&G’s Beauty segment—home to brands like Pantene and Head & Shoulders—was the sole category to deliver positive organic sales growth in the quarter. While new CEO Shailesh Jejurikar may possess a strategy for driving growth, geopolitical realities are placing significant pressure on earnings, and the ongoing situation with Iran suggests no immediate relief. This complicates our original rationale for holding P&G as a hedge against an economic slowdown and a rotation away from high-flying AI winners. We established the position in mid-November and subsequently added to it on several occasions. Even if an economic slowdown allows P&G’s sales to outperform consumer discretionary goods—such as new sneakers and jeans—the rising oil prices driven by the Iran war are compressing the company’s input costs and bottom line. In the reported quarter, surging energy prices, elevated transportation, and material costs created a $0.06 per share headwind to earnings. Looking forward, as our Wednesday trade alert highlighted, the company projects a roughly $1 billion after-tax headwind in fiscal 2027 due to these factors. Consequently, it is prudent to maintain defensive positions that can weather top-line slowdowns while carrying less exposure to energy-driven volatility. This includes pharmaceutical and healthcare names like Eli Lilly, Johnson & Johnson, and Cardinal Health. All three stocks have risen this week, even as the S&P 500 has declined by approximately half a percent.
Quarterly results: P&G’s quarterly revenue of $21.2 billion fell short of consensus expectations of $21.38 billion, according to LSEG, though adjusted earnings per share of $1.43 beat expectations by two cents. Organic sales declined one percent in North America, despite improved consumption and market share, which initially seems counterintuitive. CFO Andre Schulten clarified that there was a “notable disconnect between sell-out and sell-in.” Sell-in refers to what P&G sells to retailers, whereas sell-out represents what retailers sell to customers; for P&G, sell-in constitutes its recorded sales. While sell-out increased two percent in the quarter, sell-in fell one percent. Consumers were purchasing more P&G products, boosting market share over competitors, but retailers did not replenish their inventories accordingly. They effectively drew down accumulated inventory ahead of the quarter. It is also worth noting that Amazon’s Prime Day occurred in late June—P&G’s fiscal fourth quarter—rather than in early July (fiscal first quarter), meaning some inventory builds in the prior quarter likely contributed to lower sell-in figures for P&G during the fourth quarter. Organic sales also declined one percent in Europe, where Schulten noted a similar dynamic. In Greater China, however, organic sales grew four percent, with Schulten highlighting positive momentum heading into the current quarter.
