Colgate Earnings Review: Tough Macros Can Offset The Benefits Of Higher Advertising Spend

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Colgate Palmolive

Colgate Palmolive (NYSE:CL) released its earnings on April 28th. The company’s net sales remained flat, whereas the organic sales saw a mild up tick of 0.5% as the growth in its primary market, Latin America, was offset by depressed performance in North America, Europe, and Asia Pacific.  Just like its peers, Colgate, too, saw a rise in its gross and operating margins despite sluggish top-line growth. This was primarily because of new premium range products and successful cost savings from funding-the-growth initiative.

Key highlights which can have an impact on Colgate’s future results are:

  1. Colgate will increase its y-o-y advertising spend in the upcoming quarters as well.
  2. Tough macros have led the company to reduce its top-line guidance for the full year.

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See our complete analysis for Colgate-Palmolive

Higher Ad Spend Can Help In Gaining Market Share

Colgate has increased its advertising spend by 1% in the first quarter, and has guided towards a full year rise as well. In fact, it nearly doubled its advertising spend in Africa/Eurasia. Under its new advertising strategy, Colgate is focusing more on cheaper and effective in-store marketing in the form of higher shelf space, unique counters, and catchy banners.

Colgate’s decision to keep its advertising up for the year can help it to gain some market share in the upcoming quarters as the company believes that its results are responsive towards higher advertising spends. More importantly, the operating margins continued to expand despite a hike in advertising, which leaves the company in a comfortable position to spend further on this without compromising with its bottom-line.

Sluggish Macros And Tough Competition Can Continue To Haunt Consumer Giants

The company has announced that its organic sales growth can slightly miss the earlier guidance of 4-7%. This has been because of its poor performance in most of the regions except Latin America. These tough macro conditions have also weighed on the results of its peers such as P&G and Kimberly Clark. The point of concern is that the company’s organic volume, too, has declined in all the regions of its operation, except in Latin America and Europe, from where it experienced a flattish volume growth rate of 0.5%. The lower volumes are depicting a tough competitive environment which can offset the advantages of increased advertisements to some extent until there is some improvement in the market growth rates led by a rebound in the consumer demand.

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