Key Takeaways From Colgate-Palmolive’s Q4 Earnings

by Trefis Team
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Colgate Palmolive (NYSE:CL) reported better-than-expected fiscal fourth quarter earnings on Friday, January 26, as its earnings per share came in line but revenue missed market expectations. Below we highlight some of the most notable items from the earnings release using our Interactive Dashboard. You can modify our forecasts for the company’s revenues and key drivers to see how changes would impact its earnings and valuation.

Colgate’s net sales were up 4.5% year-over-year (y-o-y) in the quarter, with 3% volume growth, -1% pricing, and a 2.5% foreign exchange benefit. The company’s organic sales growth grew 2% y-o-y in the fourth quarter, driven by healthy volume increases across most geographies other than Africa/Eurasia. On a GAAP basis, the company’s gross margin fell 60 basis points (bps) to 59.8%, driven by higher raw and packaging material costs, partially offset by cost savings from funding-the-growth initiatives. Its operating profit margin was also down 200 bps y-o-y to 23.7% in Q4, primarily due to growth in advertising investments and overhead expenses. In addition, the company’s diluted earnings per share declined 46% y-o-y to $0.37 in Q4, largely as growth in company’s sales was more than offset by higher one-time charges related to its Global Growth and Efficiency Program as well as U.S. tax reform.

Soft Demand In North American Market

Colgate-Palmolive’s lower-than-expected revenue for the fourth quarter of the year came as its saw slow sales growth in North America, which grew only 1% during the quarter. Moreover, the company’s developed markets sales grew 4.5% y-o-y, with organic sales up 1.5%, driven by 3.5% y-o-y volume growth. On the other hand, the company’s emerging markets sales grew 5% y-o-y, with a 2.5% y-o-y growth in organic sales, driven by 2.5% y-o-y volume growth. To give a context on geographies, almost 75% of Colgate’s net sales are generated from markets outside the U.S., with approximately 50% of the company’s net sales coming from emerging markets (which consist of Latin America, Asia ex. Japan, Africa/Eurasia and Central Europe).

Higher Ad Spend Could Boost Organic Growth

Colgate-Palmolive’s organic growth averaged between 5% to 6% for the company at large between 2000 and 2015. Its organic growth subsequently dipped to 4.0% in 2016 and to just 1.0% in 2017 on the back of a slowdown in most geographical areas, notably in North America, Asia-Pacific and Africa/Eurasia. Consequently, the company plans to reignite this growth by boosting advertising spending again after it cut these expenditures dramatically in past few years.

Colgate’s advertising budget stood at roughly $1.8 billion in 2013 and was cut three years in a row to $1.5 billion by 2015, before it hiked the budget again by 10% in 2017. The company’s decision to keep its advertising up for the year should help it gain market share in the upcoming quarters, as the company assumes that its results are responsive towards higher advertising spends.

Future Outlook

Going forward, Colgate-Palmolive expects a rebound in 2018, and expects its net sales to increase in mid-single digits and organic sales growth to range between 3% to 5% in the same period. In addition, the company expects its gross margin expansion to be in the range 75 to 125 bps range in 2018, driven by a combination of pricing and productivity from the funding-the-growth initiatives which could more than offset higher raw material costs. Also, the company expects GAAP earnings per share to be up double digits for the year.

Our $75 price estimate for Colgate-Palmolive is slightly ahead of the current market price.

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