Colgate Pre-Earnings: Organic Sales In North America, Currency Headwinds In Emerging Markets In Focus

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Colgate Palmolive

Colgate-Palmolive (NYSE:CL) is slated to release its Q3FY14 results on October 24th. Sales for the largest oral care product manufacturer have been tepid this year, due to significant impact from currency effects and the strengthening US dollar. Net sales in Q2FY14 were flat compared to a similar period a year ago, at $4.35 billion. Currency fluctuations had a negative four percentage-point  impact of sales, excluding which organic sales increased 4% compared to Q2FY13. Within organic sales, growth in volumes contributed 2.5% while pricing gains contributed 1.5%. For the six months in FY14, organic sales grew 5.5%, boosted by a 4% increase in volumes.

Gross profit margins for the company expanded by 50 basis points on a year on year basis to 58.6% last quarter, supported by cost savings from its funding-the-growth initiatives and partially offset by higher raw material and packaging materials costs. Operating profits registered a higher growth in Q2FY14, growing 8% to $980 million, helped by one-off restructuring and disposal of asset charges that depressed margins in Q2FY13. On a non-GAAP basis (excluding these charges for Q2FY13), operating profits increased 2% to $1.06 billion in Q2FY14. This resulted in a 60 basis point expansion in non-GAAP operating profit margins during the second quarter of FY14.

See our full analysis for Colgate-Palmolive

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Colgate-Palmolive’s oral, personal and home care products accounts for nearly 88% in total sales. The company is the market leader in most oral care product categories, and has been gaining market share through consistent product innovation and promotions. In the toothpaste category, Colgate has a 44% share worldwide, and is the market leader in the U.K., Germany, Australia, China, Brazil, Mexico, India and Russia. Colgate is also the market leader in the manual toothbrush category, with a worldwide market share of over 33%. However, Colgate lags behind P&G in the mouthwash category, with a market share of 17% worldwide. Mouthwash products have lower product penetration in emerging economies, helping P&G retain its market leadership in the segment through its strong network in developed economies.

Oral Care Sales in North America Could Grow Faster on Premium Products

Within the domestic U.S. market, Colgate has a 35% share, behind market leader P&G which has a 38% share, and has been aggressively rolling out products to close the gap. Recently, the company launched its latest toothpaste innovation, Colgate Enamel Health Toothpaste, and believes its entry into the fastest growing segment within toothpastes, enamel strengthening, could lead to market share gains going forward. In addition to innovation in toothpastes, Colgate has also benefited from strong demand for premium toothbrush products such as Colgate 360º and Colgate Slim Soft in its biggest markets.

The North American market accounts for about 20% of Colgate’s oral, personal and home care revenues. Therefore, strong product uptake from a new product in the premium category should lift volume growth and expand selling prices for Colgate.

Impact of Currencies on Emerging Market Organic Sales in Focus

Colgate has a much stronger brand presence in emerging markets, as observed from its market leadership position in the biggest emerging markets of China, Russia, Brazil, India and Mexico. In the Latin American market, organic sales increased 8% last quarter, supported by decent volume gains and strong price expansions. However, currency headwinds had a negative 12% impact on organic sales, decreasing net Latin American sales by 4% in Q2FY14.

Currency headwinds in Asia had a negative 4.5% influence on organic sales, which registered a 3% increase in Q2FY14, driven by robust demand for toothpastes and manual toothbrushes from Philippines, India and Thailand. Similarly, smaller markets of Eurasia and Africa also had a strong demand for manual toothbrushes and toothpastes, registering an organic sales growth rate of 6.5% year on year in Q2FY14. However, currency headwinds were stronger than the organic growth rate, at 7.5% last quarter, resulting in a 1% decline in reported revenues from the region.

For the upcoming quarter, we expect lower impact of currency headwinds on organic sales from emerging markets. The Euro has depreciated significantly against the U.S. Dollar, while most emerging markets currencies have held their ground against the strengthening Dollar this quarter. On the flipside, organic sales could increase further in these markets on the back of higher discretionary income levels and the introduction of premium products from Colgate.

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