Colgate-Palmolive Earnings Preview: Premium Products Will Cushion The High Currency Headwinds
Global leader in oral care, Colgate Palmolive (NYSE:CL) will release its Q4 earnings on Friday, January 27th. The company reported strong organic sales growth of 4.5% in Q3 and the first nine months of 2016. This was broadly because of volume growth which was backed up by innovation and high promotional activity. However, Colgate’s net revenues for the first nine months declined by over 5% owing to the strong currency headwinds from the emerging nations, especially from Latin American and African countries from which Colgate Palmolive derives 40% of its sales. On the positive side, Colgate Palmolive’s margins improved in lieu of premium products being rolled out in the market. Better margins, along with cost savings from its funding the growth initiative, have led to an increase in Colgate’s EPS despite a tumbling top line.
We believe Colgate Palmolive’s Q4 top line should continue to be driven by the increased advertising spending and premium product innovations. However, the currency headwinds might again offset this growth as the US dollar strengthened by over 7% in Q4.
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See our complete analysis for Colgate-Palmolive
Higher Advertising Spending To Help Improve Volumes; Shift Towards Premium Products To Benefit The Bottom Line
- In Q3, Colgate Palmolive’s toothpaste market share increased by 20 basis points sequentially to reach 44%. This was led by volume growth in premium products, especially in the oral care category, [1] which along with cost savings and restructuring benefits resulted in a year-over-year gain of over 1 percentage point in the company’s gross margins during Q3. The company has guided for another sequential rise in its gross margin in the fourth quarter.
- According to the company’s management, higher gross margins are helping it increase its advertising spending. In Q3, Colgate Palmolive increased its advertising spend by over 3%, taking the figure to $339 million which is 8.7% of the company’s total revenues. We believe this was another factor that helped Colgate to report an increase in its market share, which was preceded by a fall in the first two quarters.
- Looking at the fact that the above two factors helped the company to improve its volumes and earnings in Q3, we believe the company will continue with the same strategy in future, which could lead to further improvement in volumes and earnings.
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