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Colgate (CL) Well Poised on Growth Strategies Amid Cost Woes

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Colgate-Palmolive Company (CL - Free Report) appears well placed for long-term growth, thanks to solid business strategies. The company has been driving growth via product innovation, in-store implementation and expansion plans. Increased focus on premiumization and digital transformation also bodes well.

Driven by these factors, it reported impressive third-quarter 2021 results, with earnings and sales beating the Zacks Consensus Estimate and rising year over year. The results gained from growth in volumes and higher pricing. Net sales increased 6.5% from the year-ago level, with organic sales growth of 4.5%. This marked the 11th successive quarter of organic sales growth within or beyond its target of 3-5%. Adjusted earnings of 81 cents per share rose nearly 3% from the prior-year level.

Shares of this Zacks Rank #3 (Hold) company have increased 14.3% in the past three months compared with the industry’s 14% growth.

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Factors Narrating Colgate’s Growth Story

Colgate remains focused on the premiumization of the Oral Care portfolio through major innovations. Backed by premium innovation, products including CO. by Colgate, Colgate Elixir toothpaste and Colgate enzyme whitening toothpaste have been performing well. This led to organic sales growth of mid-single digits in the oral care business for the third quarter. Some other notable innovation efforts include Colgate Renewal in the United States, Colgate Enzyme Whitening toothpaste in China and the natural extracts line and Colgate Total Anti-Tartar Line in Latin America, continued expansion of the Naturals and Therapeutics divisions, the Hello Products LLC buyout, and the launch of electric toothbrushes in Latin America, in collaboration with Philips.

The company is aggressively expanding the geographic footprint of its brands and carrying out enhanced distribution to faster-growth channels. It has expanded its portfolio by introducing pharmacy brands like elmex and meridol to newer markets. CL’s professional skincare businesses — Elta MD and PCA Skin in spas and dermatology clinics — are performing well. Colgate has also expanded the premium skincare portfolio with the buyout of the Filorga skincare business. It is gaining from strong market share gains in North America and China, its two largest markets, with increased share gains across all other regions.

Colgate’s Hill's business continues to witness momentum, with sales growth of 20% for the third quarter and a 19% rise in organic sales, driven by strength in Hill's Prescription Diet Gastrointestinal Biome and Hill's Science Diet Perfect Digestion. The company’s newly launched Prescription Diet Derm Complete has been gaining market share and is likely to be rolled out internationally in the coming quarters.

Hurdles on the Path

Colgate continues to struggle with industry-wide raw material inflation. Raw material cost inflation had a 510-basis point impact on the gross margin in third-quarter 2021. The company has also been witnessing restricted mobility and supply-chain disruptions from the pandemic along with a rise in raw material and logistics costs. Management expects cost-related headwinds to persist in the coming days.

Also, dismal margins stemming from elevated advertising investments remain a concern. For 2021, management expects gross margin to decline on a GAAP and an adjusted basis. The company anticipates bottom-line growth at the lower end of low to mid-single digits on a GAAP basis. On an adjusted basis, earnings growth is expected to be at the lower end of the mid to high-single-digit range. CL’s guidance is based on the current spot rates.

Bottom Line

We believe that Colgate remains well placed on the back of product innovation and expansion plans, which are likely to help offset cost headwinds. Topping it, a VGM Score of B and a long-term growth rate of 5.5% raise optimism in the stock.

Stocks to Consider

Some better-ranked stocks in the Consumer Staples sector include Medifast (MED - Free Report) , United Natural Foods (UNFI - Free Report) and Hershey (HSY - Free Report) .

Medifast, one of the leading health and wellness companies, currently holds a Zacks Rank #2 (Buy). MED has a trailing four-quarter earnings surprise of 17.3%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for MED’s sales and EPS for the current financial year suggests growth of 63% and 49.3%, from the year-ago period, respectivey. Shares of Medifast have risen 14.4% in the past three months.

United Natural Foods distributes natural, organic, specialty, produce, and conventional grocery and non-food products. It currently carries a Zacks Rank #2. United Natural Foods has a trailing four-quarter earnings surprise of 35.4%, on average.

The Zacks Consensus Estimate for UNFI’s sales and EPS for the current financial year suggests growth of 4.8% and 7.7%, respectively, from the year-ago figures. Shares of United Natural Foods have risen 1.5% in the past three months.

Hershey presently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 4.4%, on average. Shares of Hershey have gained 11.3% in the past three months.

The Zacks Consensus Estimate for HSY's sales and earnings per share for the current financial year suggests growth of 8.9% and 12.6%, respectively, from the year-ago reported numbers. HSY has an expected long-term earnings growth rate of 7.7%.