Colgate-Palmolive’s Volumes Could Be Under Pressure From Higher Pricing in Q3
Oral care leader Colgate-Palmolive (NYSE:CL) is slated to report its third quarter results on October 30th. [1] The company is expected to have continued to resort to price hikes to battle currency headwinds in the third quarter. The extent of the price hikes will determine whether Colgate-Palmolive’s volume growth slowed even more or if the company managed to balance price upticks with reasonable volume expansion. Lower input costs are expected to have provided some respite in the third quarter and cost savings from the Funding the Growth program are expected to have picked up in the second half of the current year. [2] If Colgate-Palmolive relied more on these factors than price hikes to offset currency headwinds, it may have been able to achieve moderate volume growth in the third quarter.
Colgate-Palmolive’s second quarter performance recap:
- Revenues declined by 6.5% year on year to $4.1 billion (5.5% growth in constant currency terms)
- Non-GAAP operating margin improved by 30 basis points year on year to 24.6%
- Non-GAAP diluted EPS contracted by 4% year on year to $0.70
Our price estimate of $61 for Colgate-Palmolive is about 10% lower than its current market price.
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See our complete analysis for Colgate-Palmolive here
Currency Headwinds Taking a Toll on Organic Revenue Growth
Like all other global consumer processed goods companies, Colgate-Palmolive is under heavy pressure from a stronger dollar relative to most major currencies. Currency headwinds dragged down revenues by as much as 12 percentage points in the second quarter, completely negating the organic revenue growth of 5.5%. Asia is the only region where the impact of currency movements has remained in low single-digits. Currency headwinds in other major international markets like Latin America and Europe and Africa have been in double digits. In case of Africa, the negative impact of currency movements surpassed 20 percentage points in the last two quarters. [3]
Given the magnitude of the impact of foreign exchange movements, Colgate-Palmolive has had to resort to proportionate price hikes in order to protect its margins. So far, the company has been able to maintain a reasonable balance between price hikes and volume growth. However, we believe that extended reliance on price upticks to protect margins may result in loss of volumes and market share. (Read: Colgate-Palmolive May be Headed for Trouble in Its Biggest Market)
Fortunately for Colgate-Palmolive, its Funding the Growth program has been yielding impressive cost savings. In the third quarter, it is also expected to benefit from commodity cost deflation. The company would be well served to rely heavily on these factors and minimize its dependence on pricing in the battle against currency headwinds. Nevertheless, further price upticks are likely to have continued in the third quarter, in line with the company’s willingness to concede volumes to protect margins. [2]
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Notes:- Colgate-Palmolive Investor Relations [↩]
- Colgate-Palmolive Fiscal 2015 Second Quarter Earnings Call Transcript, Seeking Alpha, July 30, 2015 [↩] [↩]
- Colgate-Palmolive SEC Filings [↩]