Colgate-Palmolive Company CL has been witnessing immense pressure of late. This is reflected in the company’s strained margins and recently raised cost guidance pertaining to its Global Growth & Efficiency Program. The company is also not immune to shift in consumer preference toward more natural products.
In fact, Colgate’s oral segment faced the brunt of consumer shift to Ayurvedic substitutes. Consequently, it had to resort to strategic initiatives which drove costs.
Stock Falls Year to Date
Shares of this Zacks Rank #4 (Sell) company have lost 13.9% year to date, against the industry’s growth 17.5%. That said, let’s focus on the key impediments hurting the company’s performance.
Strained Margins a Concern
While Colgate’s net sales increased 3%, volumes rallied 1.5% in the third quarter of 2017. Strained margins owing to increased raw materials and packaging costs as well as substantially higher advertising expenses negatively impacted company’s operations.
The company’s gross margins remained flat at 60.4% as gains from the cost-saving initiatives under its funding-the-growth and 2012 Restructuring Program were neutralized by increased raw and packaging material expenses. Operating margin contracted 160 bps due to higher selling, general & administrative (SG&A) expenses as a percentage of sales, including increased advertising costs. SG&A expenses, as a percentage of sales, increased 140 bps due to higher investments in advertising in the second half of 2017.
Colgate expects gross margin to expand in 2017 driven by higher volumes, productivity gains and increased cost-saving. However, it anticipates persistent pressure from increased commodity and packaging costs to hurt gross margin. Moreover, the company continues to expect higher advertising expenses in 2017, which is likely to weigh upon operating margins.
Raised Charges Guidance: Not a Good Sign
Colgate’s Global Growth and Efficiency Program is well on track. Banking on the success of this program, the company’s board approved an expansion and extension of the program on Oct 26 through Dec 31, 2019. While this will enable the company to take advantage of the incremental opportunities in the process of streamlining operations, it is likely to entail additional charges as well.
However, the company recently perked up its costs guidance related to charges arising from the expansion and extension of the Global Growth and Efficiency Program, which is likely to weigh on performance. The company anticipates the expansion to attract cumulative after-tax charges of $1,280-$1,380 million from the program, marking an increase from the previously estimated charges of $1,120-$1,170 million. After-tax charges for 2017 are now likely to be in the range of $250-$280 million. While the company’s Global Growth and Efficiency Program raises hopes, increased cost guidance remains a concern.
Bottom Line
As the company’s cost and margins guidance are not very appealing, we believe there might be immense growth opportunities in its strategic initiatives and constant innovations. Notably, the company’s Global growth Efficiency and funding-the-growth programs are well on track to enhance its market share and customer service.
Further, as part of its key innovation strategy, the company intends to come up with Naturals, an innovation to counter local toothpaste brands, particularly in Asia and Eurasia. It has managed to tailor the Naturals offerings in each of its major markets.
Do Consumer Staple Stocks Grab Your Attention? Check These
Investors interested in the same sector may also consider stocks such as Boston Beer Company Inc. SAM, Ollie’s Bargain Outlet Holdings Inc. OLLI and Lamb Weston Holdings Inc. LW. While Boston Beer sports a Zacks Rank #1 (Strong Buy), Ollie’s Bargain and Lamb Weston carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Ollie’s Bargain delivered an average positive earnings surprise of 9.5% in the trailing four quarters. It has a long-term earnings growth rate of 20.6%.
Lamb Weston pulled off an average positive earnings surprise of 11% in the trailing four quarters. In addition, it has a long-term earnings growth rate of 5.7%.
Boston Beer delivered an average positive earnings surprise of 63.4% in the trailing four quarters. It has a long-term earnings growth rate of 5%.
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