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Colgate-Palmolive Tops Analyst Estimates, but Headwinds Remain

Rich Duprey, The Motley Fool

With its most recent earnings report, Colgate-Palmolive (NYSE: CL) bounced back from a disappointing fourth quarter, topping analyst expectations with nominal first-quarter beats on the top and bottom lines. While stronger pricing along with more marketing support helped lift organic sales in the period, there's still a promotional environment undercutting the gains and putting pressure on profits.

Nevertheless, the earnings beat has investors predicting that Colgate will continue to build on a stronger U.S. market to overcome some of the weaknesses in Latin America and Europe.

Smiling woman pointing at her teeth

Image source: Getty Images.

Digging into the numbers

The consumer products giant said net sales came in at $3.88 billion, down from the $4 billion of a year ago, but slightly ahead of Wall Street's $3.87 billion forecast. Similarly, earnings of $0.67 per share beat estimates of $0.66 per share, but were down from $0.74 in last year's first quarter.

Colgate also suffered from gross margin compression as it was simultaneously being promotional and raising prices. Gross margin came in at 58.9% of sales compared to 60.2% a year ago; analysts had been expecting 59.5%. Even on a currency-adjusted basis, the 59.2% margin rate missed expectations and it represents sequential deceleration from the fourth quarter when gross margin was 59.4%.

The company also saw slippage in market share in certain markets, like Brazil, where competitors engaged in steep discounting, but the loss was small and CEO Noel Wallace said he was unconcerned about his company's positioning because Colgate still maintained an overwhelming majority of the market. He was also confident in Colgate's ability to recapture it.

However, with product innovations and the relaunch of Colgate Total and Hill's Science Diet, not to mention expansion into new markets and channels, the company looks well positioned for more growth.

Betting on pet food and toothpaste

One sure sign of the improvement was that Colgate registered 3% organic growth in the quarter, helped by both developed and emerging markets. Colgate was able to deliver growth in volume and pricing for the first time in over two years, and it occurred across the board in all four operating segments: oral care, pet nutrition, personal care, and home care.

Said Wallace during the company's earnings conference call: "We believe our plans to accelerate growth are beginning to pay off, as the stronger organic sales growth we delivered in the quarter had a better balance between pricing and volume growth than we saw in the fourth quarter of 2018. This growth was led by our toothpaste and Hill's businesses."

The pet food product's relaunch is proceeding apace because of U.S. sales, especially via e-commerce, but also in pet specialty stores as well as farm and feed outlets. It also saw volume and pricing growth in Canada, Europe, Australia, Asia, and Latin America, and Colgate expects the relaunch to continue across the globe through the first half of 2020, supported by higher pricing, new packaging, and deeper marketing.

Colgate Total was another relaunch that is on solid ground, helping Colgate's North America segment deliver 3% net sales growth and 3.5% organic sales growth. It gained market share year over year, which in the U.S. was driven by a pricing initiative that actually reduced packaging size so customers need to replenish their purchases more often and pushing unit growth higher.

North America represent more than 20% of total group revenues, and strength there was able to offset decreases of 4.5% in Latin America and 7% in Europe, markets that have served as a drag on the consumer products giant.

Challenges remain

Pricing initiatives often show the strength of a brand, and Colgate-Palmolive certainly has that going for it, but consumers do remain price-conscious and it's a delicate balance the consumer products leader needs to strike as it angles to regain its footing.

At the same time, while greater marketing spend is helping to push sales, it is coming at a cost to profit margin. It has in place some productivity programs to help offset the erosion, but rising commodity costs remain a headwind.

In short, the situation is much improved at Colgate, both here at home and globally, but it can't ignore the impact of external factors like the cost of raw materials and currency exchange rates. It's in a better space, but still has to prove it can deliver on its CEO's confidence.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool is short shares of Colgate-Palmolive. The Motley Fool has a disclosure policy.