Brand Strength to Aid Colgate (CL) Despite High Inflation
Colgate-Palmolive Company CL has been gaining from innovation, brand strength and digital capabilities drove organic sales growth, with double-digit organic sales growth in oral care and pet nutrition.
This led to the impressive second-quarter 2022 results, wherein earnings and sales surpassed the Zacks Consensus Estimate. Net sales of $4,484 million increased 5.5% from the year-ago quarter. On an organic basis, the company’s sales advanced 9%. This marked the 14th successive quarter of organic sales growth, with improvements in all divisions and categories.
The company’s innovation strategy is focused on growing in adjacent categories and product segments. It is also focused on the premiumization of its Oral Care portfolio through major innovations. Backed by premium innovation, products, including CO. by Colgate, Colgate Elixir toothpaste, and Colgate enzyme whitening toothpaste, have been performing well. This led to double-digit organic sales growth in its oral care business in the second quarter of 2022.
Some notable efforts include the continued expansion of the Naturals and Therapeutics divisions, the Hello Products LLC buyout, and a partnership with Philips to introduce electric toothbrushes in Latin America under a co-brand, namely Philips Colgate.
The company is aggressively expanding the geographic footprint of its brands, along with enhancing distribution to faster growth channels. It has expanded its portfolio by introducing pharmacy brands like elmex and meridol to newer markets. Its professional skincare businesses — Elta MD and PCA Skin — are performing well in spas and dermatology clinics.
Colgate also expanded its premium skincare portfolio with the buyout of the Filorga skincare business. It is gaining from strong market share gains in North America and China, its two largest markets, with increased share gains across all other regions.
Its Hill's business continues to witness sales momentum, with sales growth of 14.5% in the second quarter and organic sales growth of 18%. Results have gained from a 5.5% increase in unit volumes (both reported and organic) and 12.5% pricing growth, offset by a 3.5% adverse currency impact. Organic sales were aided by gains in the United States, Europe and Australia/New Zealand.
Strength in oral care and pet nutrition remain the key growth drivers. The company’s newly launched Prescription Diet Derm Complete has been gaining market share and is likely to be rolled out internationally in the coming quarters. Colgate also remains focused on expanding the availability of its products through the e-commerce channel, as more consumers are using online services for their essential needs.
Driven by the above-mentioned factors, management anticipates 2022 net sales growth toward the higher end of its previously mentioned 1-4% growth. Organic sales are expected to increase 5-7% compared with 4-6% growth mentioned earlier.
Headwinds to Overcome
The company has been reeling under higher raw material and logistics costs worldwide, which dented the bottom-line performance in second-quarter 2022. Despite the earnings beat in second-quarter 2022, Colgate’s Base Business’s (adjusted non-GAAP) earnings of 72 cents per share declined 10% from the prior-year quarter. On a GAAP basis, earnings declined 13% to 72 cents per share in the quarter under review. Adjusted earnings for 2022 are projected to decline in the mid-single digits.
Also, the rise in advertising investments remains concerning. For 2022, advertising investments are expected to increase year over year on both GAAP and adjusted basis. This is likely to hurt the gross margin on both GAAP and adjusted basis for 2022. It expects $1.3 billion in raw material and packaging inflation, along with higher logistic costs, for 2022.
Some other staples companies facing the heat due to higher freight costs are Procter & Gamble PG, The Clorox Company CLX and Church & Dwight CHD.
Procter & Gamble has been reeling under higher commodity and freight costs based on the current industry dynamics. PG’s fiscal 2022 earnings view includes an after-tax headwind of $2.3 billion from higher commodity costs and higher freight costs.
Commodity and freight costs are likely to hurt fiscal 2022 EPS by $1.33 per share on a combined basis. Procter & Gamble expects the impacts of the headwinds to be more pronounced in the first half of fiscal 2023.
Clorox has been witnessing elevated manufacturing and logistics costs, and higher commodity costs. Also, record-high input cost inflation remains concerning.
Going into fiscal 2023, Clorox expects cost inflation of $400 million, including commodities, transportation and wage inflation. CLX expects fiscal 2023 to remain challenging due to input cost inflation, supply-chain disruptions and the lapping of COVID-19 impacts.
Church & Dwight’s increased raw material, manufacturing and distribution costs are deterrents. CHD expects to face inflation at a greater rate than effective price increases in 2022.
On its second-quarter earnings call, Church & Dwight expected to witness additional cost inflation of $135 million for 2022. The incremental inflation is mainly associated with raw and packaging materials and the pass-through of similar costs from third-party manufacturers.
Conclusion
We believe that Colgate’s strategic efforts, including product innovation, brand strength and expansion plans, will help offset cost headwinds.
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