P&G warns of bigger cost hit from oil prices, even as consumer demand holds up

By Juveria Tabassum and Alexander Marrow

Oct 22 (Reuters) - Procter & Gamble on Thursday warned that rising raw material, energy and freight costs would take a bigger bite out of annual profit, even as resilient demand for its beauty and home-care products drove first-quarter sales.

The Tide detergent and Pantene shampoo maker now expects higher costs to reduce fiscal 2027 profit by about $1.4 billion, up from its previous estimate of $1 billion.

Pressures from high commodity costs are expected to increase over the next two quarters, CFO Andre Schulten said on a media call.

Still, shares of P&G rose about 6% after the company posted better-than-expected first-quarter results.

Commodity inflation has become a growing concern across industries, from consumer goods giants to airlines, as oil-price volatility following the US war on Iran pushes up fuel and transportation costs.

"P&G's results suggest the consumer is holding up better than feared," said Brian Jacobsen, chief economic strategist at Annex Wealth Management, which holds P&G shares.

The company's results offer a gauge of the resilience of US consumer spending as higher fuel and food costs squeeze household budgets and push shoppers towards cheaper alternatives.

P&G also maintained its annual forecasts for organic sales growth of 1% to 3% and core earnings of roughly $7 per share.

Schulten pointed to rising gasoline prices, continued volatility in the Middle East and inventory shifts as reasons for caution, saying the company did not want to "get ahead of ourselves." He said 3% growth would be "healthy" in the current environment.

The company's ability to raise prices to counter higher costs, however, could be crimped by the pressure on consumers already burdened by higher fuel costs, Jacobsen said.

HIGHER COSTS SQUEEZE MARGINS

P&G's core operating margin fell 80 basis points in the quarter ended September 30 despite 250 basis points of productivity savings, including efforts to streamline its supply chain under new CEO Shailesh Jejurikar.

Progress will not be a "straight line," and volatility will remain a mid-term reality, CFO Schulten said on a post-earnings call.

Higher fuel prices have pushed up transportation and freight costs for packaged-goods companies, while a shortage of truck drivers on some routes has added pressure, a P&G spokesperson told Reuters.

US retail diesel prices hit a record $6 a gallon in September following the US war in Iran and have remained elevated.

P&G was trying to raise prices alongside product innovation, without jeopardizing top-line growth, Schulten said, adding that the industry was pricing up because there was no way to recover the level of commodity pressures.

RESILIENT DEMAND LIFTS VOLUMES

First-quarter net sales rose 4% to $23.28 billion, beating analysts' estimates of $22.80 billion, according to data compiled by LSEG.

Volumes increased in P&G's beauty business, helped by demand for higher-priced hair-care products as consumers continued to spend on self-care despite pressure on household budgets from higher fuel and food costs.

Volumes in its home care business, which houses brands such as Tide and Ariel, rose 4.3%

Overall volumes rose 2.4%, while prices increased about 0.4% in the three months through September.

Swiss packaged-goods maker Nestle also topped estimates for organic sales growth on Thursday, helped by stronger volumes.

P&G's first-quarter core earnings of $2 per share beat estimates of $1.88.

(Reporting by Juveria Tabassum in Bengaluru and Alexander Marrow in London; Editing by Anil D'Silva)