Colgate-Palmolive’s Growth Decelerates Amid EM Slowdown; Innovations Help Maintain Lead

Colgate-Palmolive’s (NYSE:CL) growth slowed in the second quarter of fiscal year 2014. The oral care giant posted organic sales growth (net sales excluding the impact of acquisitions, disposals and changes in currency ) of 4% year-on-year, lower compared to 6.5% in the first quarter. The deceleration was mainly the result of the slowdown in the emerging markets that the consumer staples industry is witnessing. Earlier in July, Unilever’s CEO, Paul Polman, said, “Our markets have been challenging and we have experienced a further slow-down in the emerging countries whilst developed markets are not yet picking up.” Read our analysis of Unilever’s Q2 2014 results here: Unilever’s Home & Personal Businesses Take A Hit Due Emerging Market Weakness.

Unilever’s emerging markets growth decelerated to 6.6% year-on-year in Q2 from 8.7% for full year 2013, while that of Colgate’s slowed to 6.5% from 9.5% during the same period. For the complete year 2014, Colgate’s management now expects organic sales growth to fall at the lower end of its annual growth guidance of 5% to 7%. ^[1]

The emerging markets also impacted Colgate’s top line. The company’s Q2 net sales were even with the year-ago quarter at $4.4 billion as a 2.5% increase in volumes and 1.5% increase in prices was offset by negative 4% due to currency headwinds in the emerging markets. ^[2]

We are in the process of updating our $59 price estimate for Colgate-Palmolive’s stock, based on the results that were announced recently.

Developing Markets Slowdown but Market Shares Remain Strong

Colgate witnessed a slowdown in the important developing regions of Asia and Latin America, which together generate over 40% of the company’s sales. Year-on-year organic sales growth in Asia slowed to 3.0% from 7.5% in Q1, due to the ongoing slowdown in China.  In turn, growth in Latin America slowed to 8% from 11% in Q1, as Brazilian consumers spent more time home watching the World Cup on TV and spent less time in stores. Currency devaluations in many of the countries also weighed on the demand as goods became expensive. ^[1]

Although Colgate’s developing markets slowed, the company maintained or grew market shares in most emerging countries on the back of innovations and new product launches. It also achieved record high shares in toothpaste and manual toothbrush in some countries. In Brazil, its market share climbed to 71.9% in toothpaste and 32.8% in manual toothbrush; in Mexico its share increased to over 80% in toothpaste and 44.9% in toothbrush, and in India it hit a market share of 54.8% in toothpaste and 43.7% in toothbrush. ^[1]

Gross Margin Expansion to Help Fuel Further Gains in Market Shares

Gross margin improvements resulting from cost savings have allowed Colgate-Palmolive to spend more on advertising its products while also increasing the operating profit. Colgate’s gross margin increased by 20 bps to 58.8% in Q2, as 220 bps of growth from ‘funding the growth’ savings program and 50 bps of growth from price was offset by 250 bps of increase in material prices. ^[1]

Under its cost savings program, Colgate is: 1) substituting raw materials; 2) reducing packaging material; 3) negotiating better lease and contract terms with current suppliers; and 4) increasing manufacturing efficiency by reducing the number of stock keeping units (SKUs). The savings from the program are helping Colgate to reinvest in building its brands, which is essential to counter heightened competitive activity in some important markets such as the U.S., India and Mexico. The company realized $40 million of after-tax savings for the full year 2013, and it expects to save double the amount in 2014. ^[3]

Colgate has a rich pipeline of innovative products lined up for second half of the year. In the third quarter, the company will introduce Colgate Total Professional Breath Health toothpaste in Latin America. The toothpaste is scientifically proven to fight and neutralize bad breath-causing bacteria. The company will also launch Colgate Luminous White Instant toothpaste with optic brighteners for teeth whitening. Colgate has innovations planned for Asia too. The company will launch Colgate Plax Active Salt mouthwash in India during the fourth quarter. In China, it will launch Colgate Tea Health toothpaste that contains breath refreshing Longjing tea flavor. Longjing is a popular tea in China known to have multiple benefits such as healthy teeth and refreshing breath. ^[1]

Colgate leads the global toothpaste market with over 40% share. Its market shares in the toothbrush and mouthwash categories are also strong at 33% and 17%, respectively. We believe the company’s savings program will allow it to support the upcoming product launches with increased spending on advertising and in-store activity, which will fuel further market share gains. ^[4]

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

1. Colgate-Palmolive’s (CL) CEO Ian Cook on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, Q2 2014 [↩] [↩] [↩] [↩] [↩]
2. Colgate-Palmolive Company Quarterly Results, Colgate-Palmolive Earnings Release, Q2 2014 [↩]
3. Colgate-Palmolive Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 30, 2014 [↩]
4. Colgate Announces 2nd Quarter 2014 Results, MarketWatch, 2014 [↩]