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P&G's net sales are forecast to increase by a modest 0.35%, reaching $21.95 billion

Procter & Gamble (P&G), the consumer goods giant known for household staples like Tide detergent, Pampers diapers, and Dawn dish soap, is expected to report tepid revenue growth for its fiscal first quarter, which ended on September 30, 2024. According to analysts' estimates compiled by LSEG, P&G's net sales are forecast to increase by a modest 0.35%, reaching $21.95 billion. This growth is reflective of the broader challenges P&G faces, particularly in its two largest markets: the United States and China.

Slowing Sales Growth in Key Markets

P&G's revenue growth slowdown can be largely attributed to competitive pressures and changes in consumer spending habits in the United States, its largest market. P&G Chief Financial Officer Andre Schulten acknowledged at a recent investor conference that the first quarter would likely "not look materially different" from the prior quarter. In that period, which ended June 30, sales remained flat, while organic sales (which exclude factors like foreign exchange fluctuations and divestitures) rose by 2%, as per Reuters.

The U.S. market has been particularly challenging for P&G. The company faces stiff competition from rivals who are competing aggressively on price, particularly as inflation and economic uncertainties continue to weigh on consumers. Discount retailers and private-label products, such as Kirkland Signature from Costco and Vons from Albertsons, have increasingly captured market share as budget-conscious shoppers look for more affordable alternatives to P&G’s premium brands.

Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted that P&G has not significantly lowered its prices in recent months, a strategy that has contributed to "weaker demand and slowing sales." Meanwhile, competitors offering lower-priced goods have gained traction, particularly among consumers with tighter budgets.

Expanding to Discount Stores

To broaden its reach among low-income consumers, P&G has expanded its distribution to dollar stores, including Dollar Tree and Dollar General. These stores primarily target Americans earning less than $35,000 per year. However, many of these consumers have reduced their spending due to economic pressures, opting for store-brand alternatives instead of P&G’s branded products.

Michael Schulman, Chief Investment Officer at Running Point Capital, which holds P&G shares, warned that the company risks missing out on a significant portion of lower-income consumers by not addressing the price gap sooner. "They’re giving a huge opening to private labels like Costco’s Kirkland Signature to really get embedded into households and improve over time," Schulman said. He also pointed out that P&G's reluctance to lower prices could alienate an increasingly cost-sensitive demographic, particularly at a time when competitors are stepping up promotions and discounts.

Challenges in China

P&G's second-largest market, China, is also experiencing challenges, with consumer spending remaining weak across multiple sectors. Demand for P&G's high-end beauty products, such as SK-II face serums, has been particularly soft. Chinese consumers, who are grappling with an economic slowdown and lower discretionary income, have shown reluctance to spend on P&G's more expensive items.

Michelle Li, an analyst at Parnassus Investments, emphasized that the weakness in the Chinese market makes any growth in the U.S. market even more crucial for P&G. However, without significant price adjustments, P&G may struggle to drive the kind of volume growth needed to offset the challenges in China.

Procter & Gamble’s Profit Forecast

Despite the challenges in the U.S. and China, P&G is expected to report adjusted profit per share of $1.90 for the first quarter, slightly up from $1.83 a year earlier. For fiscal year 2025, the company has projected sales growth of 2% to 4% and core earnings per share in the range of $6.91 to $7.05.

However, analysts are cautious about the company's ability to achieve higher growth without taking more aggressive steps, such as lowering prices or introducing more promotions. Christian Greiner, senior portfolio manager at F/m Investments, said that while P&G remains a dominant player in the consumer goods sector, the company will likely need to discount its products more heavily in order to boost U.S. volumes. However, such a strategy could have a negative impact on profitability.

External Challenges: Global Tensions and Boycott Calls

Adding to P&G's challenges is the impact of rising global tensions. At the company’s annual meeting on October 8, CEO Jon Moeller acknowledged that the conflict in the Middle East had affected business operations. Pro-Palestinian activists have called for a boycott of P&G due to the company’s connections to Israel, where P&G’s products, including Pantene shampoo, are in 98% of households. P&G has offices in Tel Aviv, and the ongoing conflict has introduced additional uncertainty for the company’s operations in the region.

Procter & Gamble is navigating a challenging landscape as it prepares to report its quarterly earnings on Friday. With slower sales growth in both the U.S. and China, increased competition from private labels, and global tensions affecting its business, the company faces significant hurdles. However, with a strong portfolio of brands and a strategy that spans various price points, P&G remains a key player in the global consumer goods market. Investors will be closely watching the earnings report to see how the company plans to tackle these challenges moving forward.