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Colgate (CL) Q4 Earnings Beat, Soft 2019 View Hurts Stock

Zacks Equity Research

Colgate-Palmolive Company CL delivered better-than-expected top and bottom-line results for fourth-quarter 2018. However, earnings and sales dipped year over year. Unfavorable foreign currency mainly impacted the company’s results. Nonetheless, organic sales benefited from favorable pricing.

Though the company outlined an optimistic view for net sales and organic sales, its earnings per share forecast for 2019 was disappointing. Consequently, shares of Colgate declined 2.4% in the pre-market trading session. Moreover, this Zacks Rank #3 (Hold) stock has lost 15.4% in the past year against the industry’s growth of 0.7%.



Adjusted earnings of 74 cents per share in fourth-quarter 2018 dropped 1% from the prior-year quarter number. However, earnings topped the Zacks Consensus Estimate of 73 cents. Including one-time items, earnings were 70 cents per share compared with 37 cents reported in the year-ago period.

Colgate-Palmolive Company Price, Consensus and EPS Surprise

Colgate-Palmolive Company Price, Consensus and EPS Surprise | Colgate-Palmolive Company Quote

Total sales of $3,811 million dipped 2% from the year-ago period but beat the Zacks Consensus Estimate of $3,774 million. The year-over-year decline was mainly driven by negative currency impact of 5%. However, this was somewhat offset by 0.5% growth in global unit volume and 2.5% rise in pricing.

During the reported quarter, Colgate's sales and unit-volume growth benefited from 1% contribution from the recently acquired professional skin care business. On an organic basis, the company’s sales improved 2%.

Deeper Insight

Adjusted gross profit margin of 59.4% contracted 100 basis points (bps) from the prior-year quarter due to increased raw and packaging material expenses. However, this was partly offset by higher pricing and gains from cost savings under the funding-the-growth program.

In the reported quarter, adjusted operating profit of $936 million fell 10% while the adjusted operating margin contracted 210 bps to 24.6%. Operating margin was primarily impacted by lower gross margin, coupled with a 70 bps increase in adjusted selling, general & administrative expenses, as a percentage of sales.

Year to date, Colgate’s market share of manual toothbrushes has reached 32.3%. Further, the company has continued with its leadership in the global toothpaste market, with 42% market share year to date.

Segmental Discussion

North America’s net sales (22% of total sales) improved 5%, reflecting 3% rise in unit volume and 2.5% increase in pricing, offset by currency headwinds of 0.5%. On an organic basis, sales increased 0.5% while unit volume declined 2%.

Latin America’s net sales (23% of total sales) slipped 9% year over year due to 3.5% decrease in unit volume and negative currency impact of 10%. This was partly negated by 4.5% increase in pricing. During the quarter under review, soft volumes in Brazil and Argentina were partly compensated by volume growth Mexico. On an organic basis, sales were up 1%.

Europe’s net sales (16% of total sales) dropped 2.5% year over year due to 1% decline in pricing and 3.5% unfavorable currency exchange, somewhat mitigated by unit volume increase of 2%. Unit volume gained from strength in the U.K. and France. Further, organic sales in Europe rose 1%.

The Asia Pacific’s net sales (16% of total sales) declined 6.5%, attributable to 0.5% decline in both unit volume and pricing as well as 5.5% unfavorable currency exchange. Lower volume in Greater China was somewhat compensated with volume growth in India and Australia. On an organic basis, sales for the Asia Pacific declined 1%.

Africa/Eurasia net sales (6% of total sales) fell 5% year over year, owing to 9% impact from unfavorable currency exchange and 3.5% decline in unit volume. These were offset by 7.5% rise in pricing. Lower volumes in Turkey and South Africa were partly negated by gains in the Gulf States. Organic sales for Africa/Eurasia improved 4%.

Hill’s Pet Nutrition net sales (17% of total sales) rose 6% from the year-ago quarter. Results gained from 3.5% increase in unit volume and 4.5% rise in pricing, offset by 2% negative impact from currency. Volume growth in the United States and Western Europe were negated by the decline in Russia. On an organic basis, sales escalated 8%.

Other Financial Details

Colgate ended 2018 with cash and cash equivalents of $726 million, and total debt of $6,366 million. Net cash provided by operating activities was $3,056 million as of Dec 31, 2018.

Outlook

Going into 2019, Colgate expects strong top-line gains, backed by accelerated investments in its brands, higher pricing and strong innovation. The company’s innovation efforts will be marked by the re-launch of Colgate Total and Hill’s Science Diet as well as expansion of its naturals range.

Driven by these positives, the company expects of flat to up low-single digit in 2019, on current spot rates. Moreover, it estimates organic sales growth of 2-4% for 2019.

Further, the company plans to expand the portfolio by introducing brands like elmex and meridol to newer markets, and extending its e-commerce offerings. It is also likely to increase investments in professional skin care businesses — Elta MD and PCA Skin.

As a result, the company expects gross margin expansion in 2019, both on a GAAP and adjusted basis. On a GAAP basis, earnings per share for 2019 are likely to decline in a low-single digit. Meanwhile, adjusted earnings per share are expected to decline in a mid-single digit. Earnings per share projections are based on higher raw material costs, increase in tax rate, and uncertainties related to the global economy, currency rates and pricing.

Better-Ranked Stocks in the Consumer Staples Sector

The Procter & Gamble Company PG has average long-term earnings growth rate of nearly 7%. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Church & Dwight Co. Inc. CHD, also a Zacks Rank #2 stock, has an impressive long-term earnings growth rate of 10.2%.

Ambev S.A. ABEV has a long-term earnings growth rate of 10% and a Zacks Rank #2 at present.

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