So feel really good about where we stand with the consumer, even as they are more challenged and we’re not seeing excessive trading to private-label. We did see some during our out-of-stock period, but we’re seeing that rebound as we get back on shelf. And then retailers. I’ll just take another moment to thank them and I can’t thank them enough. They’ve been tremendous partners. And I say with confidence our relationships are stronger coming out of this. Unfortunate incident than they were heading in and they were strong heading in super grateful for their partnership and what they’ve done and we’re back focused on category growth and focused on finishing the job on distribution. And I have full confidence given the plans that we have that we will restore distribution.
It will just be how fast we can do it and on what timing. And again, some of those things are out of our control. But we have the right plans, we have the right relationships and strong brands to get it done.
Dara Mohsenian: Okay. And can you just comment on the promotional environment. And if I can slip in one more Kevin, on the margin front. You talked about leaving the year at 42%, but still well below peak levels of 45% to 46%, if you go back historically. You mentioned in response to Peter’s question that there’ll be progress in fiscal ’25, just help us understand potentially the slope of that gross margin recovery over time, the key drivers and how you think about long-term potential relative to that peak historical level. Thanks.
Linda Rendle: Sure. On the merchandising and competitive front, we continue to see merchandising levels below what we saw pre-pandemic. And we expect in the back half for those to continue to ramp up. But what I’d say is, some of that was depressed given the fact that we were out-of-stock and not had as much merchandising. But we’re not seeing anything in any material way, where we’re seeing deep discount price merchandising, where we’re seeing a fundamental change. But we would expect that, that level to rise, consistent with a more pressured consumer. And I would say there are little pockets here and there in categories, we’re seeing some competition in litter, where there’s a bit more aggressive merchandising and price promoting going on, but nothing outside of what we have assumed in our outlook from our categories and competition.
And again, we continue to expect merchandising to increase both ours and competition in the back half, but we don’t expect that to go to levels beyond what we thought pre-pandemic. And we’ll see how that plays out.
Kevin Jacobsen: And then, Dara, on gross margin. Yeah, as I said, getting to about 42 as our exit in Q4, I expect we’ll make more progress in fiscal year ’25, and I’m sure you can appreciate. I’ll refrain from being too specific. We haven’t finished our planning yet for ’25, but here’s what I expect, we will continue to drive cost savings. And as you know, we target 175 basis points of EBIT margin expansion each year. Last couple of years, we’ve been doing north of 200. So we’ll continue to drive cost savings. If you assume we’re going to move into a more normalized cost environment, potentially even some cost deflation, you can see how that 200 basis points can quickly start advancing our gross margins. It’s not being absorbed by cost inflation.
So that will be what we expect going forward. We’ll have to see where the cost environment is when we get there. Pricing will play a smaller role as we’ve now lapped US pricing, we’re still doing some pricing international, but that will play a smaller role. As we mentioned, we continue to expect improving volume trends, which will certainly contribute to margin expansion as well. So as I said, we’re going to make progress. It’s hard to call when we think we’ll get back to that initial margin, we talked about 44%. It’s hard to call exactly when we’ll get there because it’s not fully in our control. Some of that’s going to be driven on how the cost environment plays out. If we see deflation, it could move more quickly, and if it’s still continues to inflate, it may take a little bit longer.
And then, I think once we get back into a more normalized environment, typically, our cost savings is more than enough to offset a normal level of cost inflation and we can take a little bit to the bottom line. And that’s how you get that 25 bps to 50 bps of EBIT margin expansion each year ongoing. So I think, job one is to get back to that 44%, we remain committed doing that. I think over time you get back to a more modest improvement year after year in a more normalized cost environment.
Dara Mohsenian: Thank you.
Operator: And our next question will come from Filippo Falorni with Citi.
Filippo Falorni: Hey, good afternoon guys. So, Linda, I wanted to go back to your comment of, there is still some jobs to be done in terms of recovering shelf space. Maybe moving in a few categories if I look at the track channel data, there’s three big categories where your total distribution points are still below pre-cyber-attack levels particularly trash bags, bleach and cat litter. Maybe you could give us a color like what are your plans are to get the shelf space back.
Linda Rendle: Sure, Filippo. Just in aggregate, so that we’re completely clear, we are still — have fewer distribution points than we did pre-cyber. But we are close to restoring at an aggregate enterprise level. So as I mentioned earlier, we were down well over 30% in average weekly distribution points at the low point of our out-of-stocks and now we’re mid-single digits on average. But you’re right to call out that in particular, trash and cat litter, we’re actually more on track to what we originally expected in Q2 and we were able to in the rest of the categories accelerate the distribution point recovery. But trash and cat litter were more on the schedule that we had expected them to be in Q2 and there’s really two things driving it.
The first on cat litter is the ongoing catch up that we’re playing as the category has grown so fast to catch up from a supply perspective to demand. We continue to expect to make progress on that this year, but that’s part of the reason why cat litter is slightly behind. And then trash. That’s a complex category and we prioritized a certain set of items to ensure that those were on-shelf fast. And with that, we have to bring back the full distribution, particularly, I’ll call it, large sizes, is one that we have not fully restored yet. We have plans to do that in these upcoming resets. Those are important items in the category and retailers realize that. And we feel we have the right plans in place to get them back, but those are two categories that will look more like we had thought at the beginning of Q2.
But just like the rest of the categories. We believe we have the right plans. We will make progress in Q3 and Q4. And we’re not seeing anything abnormal from a consumer perspective that gives us any concern of our ability to do that.
Filippo Falorni: Great. That’s super helpful. And then Kevin, two quick follow-ups on the gross margin. First on the commodity line, it was neutral this quarter. You talked about maybe a more favorable environment. Are you expecting some deflation in the second half, meaning a benefit? And then on the manufacturing and logistics, maybe you can walk us through the drivers on that line as well.
Kevin Jacobsen: Sure, Filippo. As it relates to maybe I’ll start with all three and just talk about inflation. As you know, we came into the year expecting about $200 million worth of cost inflation. Some of that in commodities, but more of that in manufacturing and logistics, primarily driven by wage inflation. What I would tell you is we’re seeing a little bit of improvement in commodities, it’s a little bit better than we anticipated. And keep in mind, we forecast, not based on spot rates, but based on forward curves. And so I’d say we’re still generally in that $200 million range, but a little bit better news we’re seeing on commodities. Now having said that, that’s before we factor in, Argentina and sort of the new reality in Argentina.
But if I exclude that for a moment, I’d say generally playing out as we expected about $200 million of inflation, mostly in manufacturing and logistics. You don’t see it as much when you look at our web attachments in the front half of the year. We had a number of charges last year that we’re lapping. We should add more favorability in manufacturing, logistics, but that was offset by inflation in the front half and you get to a pretty neutral outcome is what you’re seeing for the front half. And now when you add in Argentina, we’re forecasting now almost 300% inflation in that economy. So we are seeing more cost inflation broadly across the supply chain, including commodities. And so I expect to have unfavorable commodity inflation in the back half of the year, a little bit of the US, but more so being driven from Argentina.
But what’s important to note, and I mentioned this earlier in Argentina, if you step back from all the noise and where it shows up in the P&L, we believe we have a plan to fully cover the negative impact to our P&L through the increased pricing we’re taking.
Filippo Falorni: Got it. Super helpful guys . I’ll pass it on.
Kevin Jacobsen: Thank you.
Operator: And we’ll move next to Chris Carey with Wells Fargo.
