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Colgate's (CL) Growth Efforts Well on Track Amid Soft Margins

Zacks Equity Research

Shares of Colgate-Palmolive Company CL have rallied 22.9% year to date, outperforming the industry’s growth of 20.4%. The company’s accelerated investments in brands, higher pricing and strong innovation along with expansion in new markets and channels act as key drivers. 

 

Let’s delve deeper.

A Brief Introspection

Colgate is on track with product innovation as part of its growth strategy over the years. The company has already re-launched Colgate Total and Hill’s Science Diet. Notably, the initial response to the re-launch of Hill’s Science Diet has been positive, with improved market share in the first quarter. The company expects to continue the re-launch globally through the first half of 2020.

Further, it continues to expand the Naturals toothpastes category, based on local insights, with the launch of the charcoal range across many countries. The Naturals range is a key area of focus for the companies in personal and home care categories.This along with accelerated investments in brands and higher pricing is likely to aid Colgate’s top line in 2019. 

Moreover, the company is focused on its expansion plans to improve organic sales performance. In 2019, it plans to expand the portfolio by introducing pharmacy brands like Elmex and Meridol to newer markets. It is also likely to increase investments in professional skin care businesses — Elta MD and PCA Skin — in spas and dermatologists. 

Additionally, it is expanding e-commerce offerings with the launch of Hill’s to home, which significantly exceeded subscription targets in the first quarter. This platform will enable pet parents to purchase prescription diet products directly from their veterinarian with home delivery option. This should enable the company to deliver strong e-commerce growth in 2019. Such well-chalked efforts are likely to drive the top line this year.

This Zacks Rank #3 (Hold) company is also progressing well with its savings programs — Global Growth and Efficiency Program or 2012 Restructuring Program and the Funding the Growth program — which are delivering impressive results.

The company’s four-year Global Growth and Efficiency Program focuses on reducing structural costs to improve gross and operating profit, standardizing processes to improve the decision-making procedure and increasing market share worldwide. It expects after-tax savings from this program to be $500-$575 million. Additionally, these programs are expected to contribute significantly toward the improvement of gross and operating margins over the long term.

These apart, the company’s first quarter marked the second straight quarter of sales beat and the third positive earnings surprise in the last five quarters. Moreover, it delivered volume and pricing growth (on an organic basis) in all four categories — Oral Care, Pet Nutrition, Personal Care and Home Care — for the first time in more than two years. Additionally, organic sales growth was led by toothpaste and Hill's businesses. 

Hurdles

Despite pricing gains, Colgate’s sales for first-quarter 2019 continued to be hurt by adverse currency rates. Adverse currency translations affected sales by 6% in the first quarter. Moreover, unfavorable currency impacted sales across all geographic regions. In fact, foreign exchange is expected to adversely impact sales and earnings in 2019. The company expects negative currency impacts of about 2-2.5% in 2019.

Further, higher raw-material costs have been hurting margins for the past few quarters. Adjusted gross margin contracted 110 basis points (bps) in first-quarter 2019, owing to increased raw and packaging material expenses. Notably, this marked the sixth straight quarter of gross margin contraction and eighth consecutive quarter of operating margin decline. We expect the company’s soft margins trend to continue in 2019, as raw-material expenses are likely to increase.

Though Colgate expects strong top-line growth in 2019, its earnings outlook remains bleak. The company expects higher raw-material costs, increase in tax rate, and uncertainties in the global economy, currency rates and pricing to hurt the bottom line. Consequently, adjusted earnings per share are expected to decline mid-single digit.

Bottom Line

All said, we expect the above-mentioned initiatives to offset rise in raw-material costs and the impact of foreign exchange.

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Church & Dwight CHD has an expected long-term earnings growth rate of 8.6%. It currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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