Can Colgate's (CL) Growth Efforts Offset Cost Headwinds?
Colgate-Palmolive Company CL remains committed to delivering growth in the long term, banking on its robust business strategies and sound fundamentals. The company has been gaining from pricing actions, investments in premium innovation and digital transformation. Also, strength in Hill's business bodes well.
This led to a robust top-line performance in first-quarter 2022, wherein net sales not only beat the consensus mark but also grew year over year. On an organic basis, the company’s sales advanced 4%. This marked the 13th successive quarter of organic sales growth within or beyond its target of 3-5%. The company also reported sales growth of 0.5%, 5.5% and 11% for the North America, Latin America and Hill’s Pet Nutrition segments, respectively.
Consequently, management updated its sales guidance for 2022. It anticipates net sales growth toward the higher end of previously mentioned 1-4% year-over-year growth. Organic sales are expected to increase 4-6% compared with 3-5% growth mentioned earlier.
We also note that shares of CL have lost 3.3% in the past three months but came ahead of the industry’s decline of 5.6%.
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That said, let’s delve deeper into the factors driving this Zacks Rank #3 (Hold) stock.
Factors Narrating CL’s Growth Story
Colgate remains 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 organic sales growth of 2% in its oral care business in the first 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 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.
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.
Colgate’s Hill's business continues to witness sales momentum, with sales growth of 11% in the first quarter and organic sales growth of 13%. Results gained from a 4% increase in unit volumes (both reported and organic) and 9% pricing growth, offset by a 2% adverse currency impact. Organic sales were aided by gains in the United States and Europe. The wellness and therapeutic categories acted as key growth drivers.
Strength in Hill’s Prescription Diet and Hill’s Science Diet remain 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.
Headwinds to Overcome
Colgate has been reeling under higher raw material and logistic costs worldwide despite sales growth. This led to a year-over-year bottom-line decline in the first quarter. Colgate continues to anticipate earnings growth in double-digits on a GAAP basis. On an adjusted basis, earnings are expected to decline in the mid-single digits compared with low to mid-single-digit growth stated earlier.
In first-quarter 2022, management witnessed higher-than-anticipated raw material cost inflation, particularly fat and oil, and logistics. Notably, raw and packaging material cost inflation had a 590-bps impact on the gross margin in the first quarter of 2022. This was partly negated by a 200-bps increase in pricing and 170 bps cost savings from the funding-the-growth initiatives.
The company witnessed a significant increase in costs for fat and oil, which include palm oil, palm krona oil, soybean oil, tallow and others, which attracts the highest raw material spends after coal new resins. Each of the company’s segments incurred significantly higher raw and packaging material costs in the first quarter.
Also, it incurred higher logistics costs, owing to volume and capacity constraints in the shipping and logistics industry, higher e-commerce demand, and the impacts of the Ukraine war. The company expects a gross margin decline on both GAAP and adjusted basis for 2022 versus the prior mentioned gross margin expansion.
Bottom Line
We believe that Colgate’s strategic efforts, including product innovation and expansion plans, will help offset cost headwinds. A long-term earnings growth rate of 4.9% raises optimism about the stock.
Stocks to Consider
We highlighted some better-ranked stocks from the broader Consumer Staples space, namely Campbell Soup CPB, Chef Warehouse CHEF and Sysco Corporation SYY.
Sysco, the marketer and distributor of food and related products, currently sports a Zacks Rank #1 (Strong Buy). SYY has a trailing two-quarter earnings surprise of 93.75%, on average. It has an expected long-term earnings growth rate of 11%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Sysco’s current financial-year sales and earnings per share suggests growth of 35.9% and 145.5%, respectively, from the year-ago reported numbers. The company has a trailing four-quarter earnings surprise of 3.7%, on average.
Chef’s Warehouse, a distributor of specialty food products in the United States, currently flaunts a Zacks Rank #1. CHEF has a trailing four-quarter earnings surprise of 372.3%, on average.
The Zacks Consensus Estimate for Chef Warehouse’s current financial-year sales and earnings per share suggests growth of 38.1% and 2540%, respectively, from the year-ago reported numbers.
Campbell Soup, the manufacturer and marketer of high-quality, branded convenience food products, currently carries a Zacks Rank #2 (Buy). It has an expected long-term earnings growth rate of 1.6%.
The Zacks Consensus Estimate for Campbell Soup’s current financial-year sales and earnings per share suggests growth of 10.1% and 15.4%, respectively, from the year-ago reported numbers. CPB has a trailing two-quarter earnings surprise of 10.8%, on average.
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