Did Price Hikes Dampen Colgate-Palmolive’s Volume Growth in Q2?

Global oral care behemoth Colgate-Palmolive (NYSE:CL) is set to report its fiscal 2015 second quarter earnings on July 30th. Like other US-based global consumer processed goods companies, Colgate-Palmolive has been battered by severe currency headwinds in recent quarters. This trend is expected to have continued in the second quarter as well. Further, Colgate-Palmolive managed to maintain a balance between price hikes and volume growth in the first quarter, unlike the fourth quarter of fiscal 2014. (Read: Currency Headwinds Dampen Colgate-Palmolive’s Sales in Q1, Robust Cost Savings Continue) It remains to be seen if the company is able to maintain volume growth while raising prices to counter currency headwinds in the second quarter as well.

Our price estimate of $60 for Colgate-Palmolive is about 10% lower than its current market price.

See our complete analysis for Colgate-Palmolive here

Prices Expected to Go Up in Q2, Will Volumes Suffer?

In the first quarter of fiscal 2015, pricing contributed 250 basis points to year on year revenue growth. ^[1] However, prices were lower compared to the fourth quarter of fiscal 2015 as Colgate-Palmolive sought to revive volume growth amidst sluggish consumption. ^[2] The company stated in the first quarter earnings call that it expects pricing to build through the rest of the year, which leads us to believe that prices are likely to have been higher sequentially as well as year on year in the second quarter.

Since consumer spending and consumption remain sluggish in most parts of the world, consumers are especially finicky about prices in the current environment. Thus, if Colgate-Palmolive raised prices heavily in the second quarter, it could have come at the expense of volume growth. However, the company believes that it still has meaningful pricing power, which could help it expand volumes as well as its oral care market share as the year progresses. ^[2]

Margin Expansion Likely to Continue

Even as Colgate-Palmolive struggles with the fine balance between price hikes and volume growth, it has consistently improved its bottom-line through a robust cost saving program. In the first quarter, its Funding the Growth cost saving program helped the company improve the non-GAAP operating margin by 40 basis points year on year. The Funding the Growth program and a minor positive impact from restructuring measures provided a benefit of 170 basis points on the first quarter gross margin.

For the full year, Colgate-Palmolive expects the Funding the Growth program and price upticks to help it expand the gross by 50 to 100 basis points. ^[2] These measures could help the company partially offset the disastrous impact of currency headwinds on its bottom-line.

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1. Colgate-Palmolive Fiscal 2015 First Quarter SEC Filing [↩]
2. Colgate-Palmolive Fiscal 2015 First Quarter Earnings Call Transcript, Seeking Alpha, April 30, 2015 [↩] [↩] [↩]