Colgate-Palmolive Company CL has been battling margin pressures for the past few quarters now, mainly due to increase in raw material expenses. In fourth-quarter 2018, the company marked its fifth straight quarter of gross margin contraction, with the seventh consecutive quarter of operating margin decline.
Gross margin in the fourth quarter contracted 100 basis points (bps) due to higher raw and packaging material expenses. Lower gross margin coupled with higher selling, general & administrative expenses, as a percentage of sales, resulted in operating margin contraction of 210 bps. We expect the company’s soft margin trend to continue in 2019 as raw material expenses are likely to increase.
Moreover, higher raw material costs along with increase in tax rate, and adverse currency fluctuations and pricing are likely to hurt the bottom line. Apparently, adjusted earnings per share for 2019 are expected to decline in a mid-single digit.
In fact, Colgate’s vast global footprint exposes it to various risks including foreign currency translations. Unfavorable foreign currency mainly impacted the company’s fourth-quarter results and will continue to hurt earnings and sales in 2019. It expects negative currency impacts of about 2-2.5% in the current year.
A glance at the company’s price performance in a month shows that the stock has gained a meager 2.1%. In a year’s time, shares of this Zacks Rank #4 (Sell) company have lost 6.1% against the industry’s 15.5% rally. This underperformance can be attributed to Colgate’s sales surprise history. The company missed the Zacks Consensus Estimate for sales in 21 of the trailing 23 quarters.
Can Colgate’s Savings Efforts Drive Margins?
While the above-mentioned factors make us apprehensive about Colgate’s performance, the company seems to be on track with its savings programs and other strategic efforts. Notably, the Global Growth and Efficiency Program or 2012 Restructuring Program and the Funding the Growth initiatives are boding well for the company.
In fact, the success of the Global Growth and Efficiency Program prompted the company’s board to approve expansion and extension of the program through Dec 31, 2019. This, in turn, will enable Colgate to streamline its operations. It expects after-tax savings of $500-$575 million annually from the program.
In addition, Colgate’s innovation strategy is focused on growing in adjacent categories and product segments. In 2019, the company will re-launch Colgate Total and Hill’s Science Diet, as well as continue with the expansion of the Naturals range. In 2018, it rolled out the Naturals offerings in toothpastes across 79 countries. Colgate continues to expand the Naturals toothpastes, based on local insights, with the launch of the charcoal range across many countries.
Markedly, the Naturals range is a key area of focus in personal and home care categories. Product innovation and launch are likely to drive the company’s top line as evident from management’s expectations. It expects robust sales in 2019 backed by accelerated investments in brands, higher pricing and strong innovation.
We expect Colgate’s savings and innovation efforts to boost margins and overall profitability in the future.
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