Colgate-Palmolive (CL) Up 3.7% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Colgate-Palmolive (CL). Shares have added about 3.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Colgate-Palmolive due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Colgate Q1 Earnings & Sales Top Estimates

Colgate-Palmolive delivered better-than-expected top and bottom-line results for first-quarter 2019. However, earnings and sales dipped year over year. Unfavorable foreign currency mainly marred the company’s results. Nonetheless, favorable pricing aided organic sales growth. Moreover, it reiterated guidance for 2019.

Adjusted earnings of 67 cents per share in first-quarter 2019 dropped 9% from the prior-year quarter. However, earnings topped the Zacks Consensus Estimate of 66 cents. Including one-time items, earnings were 65 cents per share compared with 72 cents in the year-ago period.

Total sales of $3,884 million dipped 3% from the year-ago period but beat the Zacks Consensus Estimate of $3,862 million. This year-over-year decline was mainly driven by negative currency impact of 6%. However, this was somewhat offset by 1% increase in global unit volume and 2% rise in pricing.

On an organic basis, the company’s sales improved 3%, led by toothpaste and Hill's businesses. Notably, this growth was broad-based, with 3% growth witnessed in emerging and developed markets.

Deeper Insight

Adjusted gross profit margin of 59.2% contracted 110 basis points (bps) from the prior-year quarter due to increased raw and packaging material expenses, including currency transaction costs. However, this was partly offset by higher pricing and gains from cost savings under the funding-the-growth program.

In the reported quarter, adjusted operating profit of $907 million fell 10% while adjusted operating margin contracted 180 bps to 23.4%. Operating margin was primarily impacted by lower gross margin, coupled with a 30-bps increase in adjusted selling, general & administrative expenses as a percentage of sales.

Year to date, Colgate’s market share of manual toothbrushes has reached 31.6%. Further, the company has continued with its leadership in the global toothpaste market, with 41.7% market share year to date.

Segmental Discussion

North America’s net sales (22% of total sales) improved 3%, reflecting 2% rise in unit volume and 1.5% increase in pricing, offset by currency headwinds of 0.5%. On an organic basis, sales improved 3.5%.

Latin America’s net sales (23% of total sales) slipped 4.5% year over year due to negative currency impact of 10.5%. However, unit volume growth of 2.5% and price increases of 3.5% partly negated the decline in sales. During the quarter under review, volume benefited from gains in Mexico, Brazil and Colombia. On an organic basis, sales were up 6%.

Europe’s net sales (16% of total sales) dropped 7% year over year due to 1% decline in pricing and 7.5% impact of unfavorable currency exchange, somewhat mitigated by unit volume increase of 1.5%. Unit volume gained from strength in the U.K. and Nordic regions. Further, organic sales in Europe inched up 0.5%.

The Asia Pacific’s net sales (18% of total sales) declined 8%, attributable to 2.5% decline in unit volume and 5.5% impact of unfavorable currency exchange while pricing remained flat. Lower volume in Greater China was somewhat compensated with volume growth in India, Australia, Thailand and the Philippines. On an organic basis, sales for the Asia Pacific declined 2.5%.

Africa/Eurasia’s net sales (6% of total sales) fell 6% year over year, owing to 13% impact of unfavorable currency exchange and 7% decline in pricing while unit volumes were flat. During the quarter, volume gains in Russia and the Gulf States were partly negated by declines in Saudi Arabia and South Africa. Organic sales for Africa/Eurasia improved 7%.

Hill’s Pet Nutrition’s net sales (15% of total sales) rose 3% from the year-ago quarter. Results gained from 2% increase in unit volume and 4% rise in pricing, offset by 3% negative impact of currency. Volume growth in the United States and western Europe were negated by soft volumes in South Africa and Russia. On an organic basis, sales rose 6%.

Other Financial Details

Colgate ended first-quarter 2019 with cash and cash equivalents of $843 million, and total debt of $6,661 million. Net cash provided by operating activities was $605 million as of Mar 31, 2019.

Outlook

Going into 2019, the company expects strong top-line gains, backed by accelerated investments in its brands, higher pricing and strong innovation. Its innovation efforts will be marked by the re-launch of Colgate Total and Hill’s Science Diet as well as expansion of the naturals range.

Further, the company plans to expand the portfolio by introducing brands like elmex and meridol to newer markets, and extending e-commerce offerings. This should enable it to deliver string e-commerce growth in 2019. It is also likely to increase investments in professional skin care businesses — Elta MD and PCA Skin.

Driven by these efforts, the company reiterated sales and earnings view for 2019. It expects sales to be between flat and up in a low-single digit in 2019 on current spot rates. Moreover, it estimates organic sales growth of 2-4% for 2019.

As a result, the company expects gross margin expansion in 2019, on a GAAP and adjusted basis. On a GAAP basis, earnings per share for 2019 are likely to decline in a low-single digit. Meanwhile, adjusted earnings per share are expected to decline in a mid-single digit. Earnings per share projections are based on higher raw material costs, increase in tax rate, and uncertainties related to the global economy, currency rates and pricing.