Colgate (CL) Banks On Brand Strength Amid Cost Headwinds
Colgate-Palmolive Company CL has been gaining from innovation, brand strength and digital capabilities. The company continues to gain from its stringent pricing actions and accelerated revenue growth management plans. 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 double-digit organic sales growth in oral care and pet nutrition. Consequently, shares of this Zacks Rank #3 (Hold) stock have gained 1% in the past three months against the industry’s decline of 1.8%.
However, the company is not immune to raw material cost headwinds and unfavorable currency issues. Let’s delve deeper.
What’s Working Well for CL?
Colgate’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 like CO. by Colgate, Colgate Elixir toothpaste and Colgate enzyme whitening toothpaste have been performing well.
Some notable efforts are 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, Philips Colgate.
Colgate is aggressively expanding the geographic footprint of its brands, along with enhanced 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.
CL 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 remains a key growth driver. 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.
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Driven by these 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 are projected to decline in the mid-single digits for 2022.
Also, increased advertising investments remain 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. CL also expects $1.3 billion in raw material and packaging inflation, along with higher logistic costs, for 2022.
Moving on, the adverse impact of foreign currency and high debt levels remain deterrents for CL.
Conclusion
We believe that Colgate’s strategic efforts, including product innovation, brand strength and expansion plans, will help offset cost headwinds. A long-term earnings growth rate of 4.6% raises optimism about the stock. Also, CL’s earnings estimates for 2022 have moved up by a penny to $3.03 in the past 30 days.
Stocks to Consider
Some better-ranked stocks are The Chef's Warehouse CHEF, MGP Ingredients MGPI and General Mills GIS.
Chef’s Warehouse, a distributor of specialty food products in the United States, currently flaunts a Zacks Rank #1 (Strong Buy). CHEF has a trailing four-quarter earnings surprise of 355.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Chef Warehouse’s current financial year’s sales suggests growth of 40.7% from the year-ago reported number.
MGP Ingredients, which produces and markets ingredients and distillery products, currently sports a Zacks Rank of 1. MGPI has a trailing four-quarter earnings surprise of 76.8%, on average.
The Zacks Consensus Estimate for MGP Ingredients’ current financial-year sales and earnings per share suggests growth of 22.4% and 10.4%, respectively, from the corresponding year-ago reported figures.
General Mills, which manufactures and markets branded consumer foods worldwide, currently carries a Zacks Rank of 2 (Buy). GIS has a trailing four-quarter earnings surprise of 6.5%, on average.
The Zacks Consensus Estimate for General Mills’ current financial year’s sales and earnings per share suggests growth of 2% and 1.5%, respectively, from the year-ago reported figures.
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