Is Cost Of Sales The Key Driver Of Procter & Gamble’s Expenses And Profitability?

Procter and Gamble’s (NYSE: PG) total expenses have risen gradually from around $54.86 billion in 2017 to about $63.72 billion in 2019. However, expenses in 2019 included a one-time $8.35 billion write-down of Gillette.
Cost of sales is the biggest expense head for the company, with it being 50.2% of revenue in 2017, before increasing slightly to around 51.4% of revenue in 2019.
With revenue expected to rise steadily through 2020 and 2021, cost of sales as % of revenue is likely to drop to around 50%, with net income margin expected to grow from 5.9% in 2019 to 16.9% in 2020.
However, by 2021, net income margin is set to be around 17.2%, and this projected growth has helped drive a >30% rise in Procter and Gamble’s share price since January 2018.

In our interactive dashboard How Does Procter & Gamble Spend Its Money?, we take a look at the key drivers of P&G’s expenses and net margins.

P&G’s Net Income Margins have been on a slide, dropping from 15.7% in 2017 to 14.8% in 2018, before dropping to 5.9% in 2019, owing to the Gillette write-down. However, margins are expected to rise sharply in 2020, to levels above that of 2017, on the back of strong revenue growth.

Breakdown of Procter & Gamble’s Total Expenses

• Cost of Goods Sold has increased from $32.64 billion in 2017 to $34.77 billion in 2019, driven primarily by growing raw material costs. As a % of Revenue, Cost of Goods Sold has grown marginally from 50.2% to 51.4% over the same period. The metric is expected to drop to 50% by 2021 due to a sharp rise in revenue.
  
• SG&A Expense has grown from $18.65 billion in 2017 to $19.08 billion in 2019. Expense has grown marginally over the past 2 years, but we expect this metric to rise further in 2020 and 2021, as P&G’s revenue is expected to grow at a rate faster than the past 2 years. As a % Revenues, SG&A has declined from 28.7% in 2017 to 28.2% in 2019.
• Goodwill and Impairment charges made up the remaining $8.35 billion of operating expenses in 2019. This was a one-time expense, due to the write-down of P&G’s Gillette brand. As a % of Revenue, goodwill and impairment charges for 2019 came in at 12.3%.
• Non-Operating Expense Has Decreased From $509 million in 2017 to -$582 million in 2019. There was a sharp drop in 2019 due to a drop in other non-operating expenses, which include restructuring costs and other miscellaneous expenses. P&G’s total debt has dropped from $31.59 billion in 2017 to $30.09 billion in 2019. We expect debt to drop to around $28.63 billion by 2021, with net interest expense to drop to $234 million.
• Income Tax Expense first increased from $3.06 billion in 2017 to $3.46 billion in 2018, before dropping to $2.1 billion in 2019, on the back of a drop in taxable income. Going forward, we expect an effective tax rate of 22.5%, with income tax expenses coming in around $3.5 billion for the next 2 years.

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