Colgate Palmolive’s Q3 Earnings Preview: Weak Macro Environment Continues To Put Pressure On Sales But Cost Savings Can Help Lift Bottom Line

by Trefis Team
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Colgate-Palmolive
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A global leader in oral care, Colgate Palmolive (NYSE:CL) will report its Q3’16 earnings on October 27th. Colgate has been one of the very few consumer goods companies that have somewhat managed to weather  the negative impact of high currency headwinds and weak economic conditions. Colgate’s organic sales have grown at over a 5% CAGR since 2011, and its gross margins touched an all time high of over 60% in Q1 and Q2 of 2016. This can primarily be attributed to the combined effect of Colgate’s robust marketing, innovation and cost saving strategies. Though Colgate’s Q3 2016 earnings are likely to bear the brunt of weak global macro-economic conditions, we believe that the company’s unique market penetration techniques and region specific products might offset the macro weakness to some extent.

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See our complete analysis for Colgate-Palmolive

Demand From Emerging Markets Remains Weak

Emerging markets account for 55% of Colgate Palmolive’s revenues, which turned out to be a dragging factor for Colgate’s Q2 results, as both the net sales and net volumes saw a decline across the developing regions. Latin American results were the worst hit as Colgate reported 16.5% and 13.5% decline in sales and volume respectively. This was a result of net 13.5% currency headwind from the region. The situation in the emerging markets have not improved much since then as evident from Unilever’s (NYSE:UL) Q3 results (See Brexit and High Commodity Prices Weigh On Unilever’s Q3 Results).  However, the currency headwind might be a bit weaker this time as most of the currencies from these regions (the Brazilian Real, Argentinian Peso and India Rupee) have either strengthened or  remained flat against the US Dollar. The volume growth is likely to have remained negative in the wake of falling consumer confidence index around the world.

Cost Savings Initiative Will Continue To Support The Bottom-line

Historically, the company’s ‘Funding The Growth’ cost saving initiative has played a crucial role in supporting its bottom-line. Under this initiative, Colgate focuses on reducing overhead costs by increasing the efficiency of their operations and innovations, while reducing unnecessary headcount. To achieve this goal, the program comprises six steps, which include budgeting, brainstorming, evaluation, implementation, tracking and reporting. Due to the cost savings achieved from this program, Colgate’s non-GAAP EPS remained constant in Q2’16 due to the gross margins of over 60%, as compared to 58.7% in 2015, despite a 5.4% year-over-year decline in net revenues. Amidst the slowdown in consumer demand, Colgate must have focused on cost savings in Q3 too, which might have kept the bottom line intact.

Increased Online Presence And Customer Engagement To Boost Sales

Colgate has been quite active when it comes to customer engagement in their products. The company frequently organizes free checkups and attractive marketing campaigns at supermarkets all around the world, which has helped it to maintain its top spot in oral care market with over 40% global share.

In Q3 2016, Colgate entered into a partnership with Alibaba in order to increase its online presence in China. According to a survey done by Nielsen, 37% of Asians (46% of Chinese) said that they shop online. Colgate’s online oral care sales in China grew by 175% in 2015 and given the fact that the company derives about 31% of its net sales from Asia Pacific, any successful marketing campaign in the region can have a significant positive impact on the company’s top line.

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