Colgate Volumes Disappoint, Concerns on Pricing Persist

Colgate-Palmolive (NYSE:CL), the world leader in oral care, released Q1 2011 Earnings on April 28th. While we had expressed our concerns with regards to Colgate’s operating margins, an item discussed in Colgate-Palmolive Earnings Preview-What We’re Watching, what came as a bigger disappointment was the low growth in volumes despite heightened promotional activity. While many leading consumer goods players like Procter & Gamble (NYSE:PG), Unilever (NYSE:UL) and Kimberly-Clark (NYSE:KMB) are raising prices to counter the rising commodity prices, we expect that Colgate-Palmolive might hold prices stable vs. competitors in an effort to drive volumes. If the volumes do not come, higher advertising spend might be warranted to drive consumer demand, which will eat away at profits and ultimately the stock price.

We currently value Colgate-Palmolive with a $85.80 Trefis price estimate of its stock, roughly inline with the current market price.

Q1 2011 Highlights

Stable to decreasing prices but low volume growth

While the total sales grew by 4.5% in the quarter ending March 31 compared to the same period last fiscal, much of this growth was on account of a favorable foreign exchange impact of the tune of 3%. Volume grew by only about 2%, partially offset by a decrease in net selling prices by 0.5%. This resulted in inorganic sales growth (which excludes the impact of foreign exchange, acquisitions and divestitures) of only 1.5%. Compare this to 2010 where the first quarter sales grew by 9.5%, of which 6% was still on account of an organic growth in sales.

Favorable FX rate to have a negligible impact

The impact of foreign change on Colgate’s earnings is at best muted. While a depreciating US dollar might have contributed to the sales growth when Colgate’s international sales are translated into dollars, the operating margins have declined at a faster pace than rising commodity prices as Colgate’s operations outside US required more dollars to meet the same operating expenses.

Pricing strategy fails in North America

Colgate’s North American operations, which make up for over a quarter of its total sales, had perhaps the most dismal performance in the first quarter. The promotional pricing led to a decline in average net selling price of 4% and the volumes still declined by almost 1%. This led to a 5% decline in organic sales for Q1 2011, compare this with a 1.5% increase in organic sales year over year.

Further reduced advertising spending

To offset the shrinking gross margins due to rising raw and packaging material costs, Colgate-Palmolive slightly decreased advertising spending from $423 million in Q1 2010 to $418 million in Q1 2011.

The recent earnings release, leads us to again question Colgate’s volume-driven growth strategy (see Should Colgate-Palmolive Focus on Volume?). Clearly the volumes aren’t coming in to validate maintaining prices and that too in an inflationary macroeconomic environment.

See our price estimate of Colgate-Palmolive’s stock here.