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Colgate's (CL) Growth Initiatives On Track, Cost Woes Persist

Zacks Equity Research

Colgate-Palmolive Company CL is grappling with a weak margins' trend and adverse impacts of foreign currency for a while now. Also, higher SG&A expenses are an added concern. We note that shares of this Zacks Rank #4 (Sell) company have declined 5.2% in the past six months compared with the industry’s decline of 0.1%.

The company continued with its dismal margins trend in third-quarter 2019. Adjusted gross margin declined 20 basis points (bps) in the third quarter, owing to escalated raw and packaging-material expenses, including foreign-currency transaction costs. This, coupled with higher SG&A expenses, as a percentage of sales, hurt adjusted operating margin, which contracted 50 bps.

Higher advertising investment resulted in rise in SG&A expenses, which was partly negated by lower overhead costs. Notably, the company delivered negative gross margin in five of the trailing six quarters. It also posted the 10th consecutive quarter of operating margin decline in third-quarter 2019.

Management anticipates a slight gross margin decline in the quarters ahead, both on GAAP and adjusted basis. Further, it expects higher advertising spending to continue to mar results.

Moreover, unfavorable movements in foreign currency have been taking a toll on the company’s top line to some extent. In third-quarter 2019, currency headwinds adversely impacted net sales to the tune of 2.5%. Moreover, unfavorable currency impacted sales across all geographic regions, except North America.

Can Efforts Aid Revival?

Colgate is on track with product innovation and in-store implementation, which have been key aspects of its growth strategies for years. The company’s innovation strategy is focused on growing adjacent categories and product segments. Further, it remains focused on the premiumization of its Oral Care portfolio through major innovations. The company has a solid innovation pipeline in the next few quarters, which includes the launch of Optic White. Additionally, it continues to expand Naturals toothpaste and prescription diet. In fact, the Naturals range is a key area of focus for the company in personal and home care categories.

Also, Colgate continues to expand portfolio by introducing pharmacy brands like elmex and meridol to newer markets. It is impressed with the performance of its professional skincare businesses — Elta MD and PCA Skin — in spas and dermatologists. Also, the company is on track to expand the premium skincare portfolio with the buyout of the Filorga skincare business. It is also expanding product availability through the e-commerce channel.

Apart from these, Colgate is progressing well with its savings programs, namely Global Growth and Efficiency Program (or 2012 Restructuring Program), and Funding the Growth. These programs are expected to contribute significantly toward the improvement of gross and operating margins over the long term.

We expect these factors to offset aforementioned hurdles and help the stock revive in the long term.

3 Stocks to Consider

Helen of Troy Limited HELE presently has an expected long-term earnings growth rate of 9.3% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Procter & Gamble Company PG has a long-term earnings growth rate of 7.5% and a Zacks Rank #2 (Buy).

The Estee Lauder Companies Inc. EL has a long-term earnings growth rate of 12.8%. Currently, it carries a Zacks Rank #2.

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