Colgate-Palmolive Q1’17 Earnings Preview : Margins Still Hold The Key To Profitability As Top Line Can Disappoint
World leader in the Oral Care market, Colgate Palmolive (NYSE:CL), will release its Q1’17 earnings on April 27th. Colgate Palmolive’s net sales have fallen by 4% annually since 2013 because of a decline in market share, currency headwinds, and economic instability in Latin American countries from where it derives a majority of its sales. Its non-GAAP EPS has remained flat during this period, though its gross margins touched the all time highs of over 60% in the last fiscal year because of a shift towards the premium products.
Two key factors which can affect Colgate’s Q1 results are:
- Dwindling consumer demand in Americas and Europe can weigh on the top line.
- Strong margin growth from FY’16 can continue into this year.
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Macros Continue To Pose A Concern
Colgate derives 45% of its sales from North and South America. As evident from the results of P&G, Unilever, and Kimberly Clark, the consumer demand around the world has been sluggish over the past few months, especially in developed markets of North America and Europe. Therefore, Colgate Palmolive’s top line is likely to under perform in these regions. However, some of these declines can be offset by better conditions in Asia Pacific, mainly in India, where the demand has recovered back after demonetization. The company has guided for 4-7% organic sales growth in 2017.
See our complete analysis for Colgate-Palmolive
It All Comes Down To Margins
Colgate Palmolive has been active in launching the premium versions of its benchmark products which has led to a continuous increase in its gross margins over the years. Colgate White Max Optic and advanced shower gels and oils from Sanex and Palmolive are the recent examples of this. Apart from premiumization, the company has been successful in implementing its Funding-the-Growth initiative through which it has managed to reduce its cost of sales, as well as the operating expenses. In FY’16, this initiative contributed to savings worth 190 bps to the gross margins, and its results were also visible from the growth in adjusted EBITDA margins, which rose to over 30% in FY’16. As top line is not expected to deliver a huge surprise, margins will continue to hold the key of profitability in the upcoming earnings.