Colgate-Palmolive Company (CL - Free Report) remains prone to a challenging backdrop due to uncertain global markets and slowing category growth rates across its key markets. Higher raw material expenses, adverse currency translations and stiff competition are added concerns. Moreover, Colgate has a dismal sales trend, having missed estimates in 21 of the trailing 22 quarters.
Consequently, shares of this Zacks Rank #5 (Strong Sell) company have lost 14.3% so far this year against the industry’s 2.3% growth. Colgate’s Value Score of F further highlights its dismal run.
Factors Hurting Colgate’s Performance
Colgate has been witnessing strained margins for a while now despite gains from its funding-the-growth program. Lower gross margin coupled with higher selling, general & administrative expenses are weighing on its operating margin. In the last reported quarter, the company saw fourth straight quarter of gross margin contraction, with the sixth consecutive quarter of operating margin decline.
In third-quarter 2018, gross margin declined 120 basis points (bps) due to increased raw and packaging material expenses. Meanwhile, operating margin contracted 190 bps. For 2018, management anticipates lower gross margin both on a GAAP and adjusted basis. It also projects higher advertising investment related to product innovations, core businesses and consumption-building initiatives, which might be detrimental to the operating margin.
Apart from missing top-line estimates in the third quarter, Colgate’s sales also fell 3% due to a 4% impact of unfavorable currency rates and flat global unit volume, offset by a 1% increase in pricing. Trade inventory reductions in China and volatility in Brazil as well as soft category growth rates were the other deterrents. Moreover, sales declined in all segments, except the North America and Hill’s Pet Nutrition divisions. Organic sales also dipped 0.5%. In the fourth quarter of 2018, management expects net sales to decline in the low-single digits range.
Furthermore, Colgate’s solid global foothold has exposed it to various risks, including foreign regulations and consumer preferences, and most prominently, currency fluctuations. Apparently, foreign currency acted as a headwind in the third quarter of 2018 and remains a concern for the fourth quarter as well.
Is There any Silver Lining for Colgate?
Colgate has a long track record of meeting or beating earnings estimates, which may be seen as a respite. For 2018, management expects 3-4% improvement in adjusted earnings per share over 2017 figure. Moreover, the company anticipates solid operating cash flow, and is optimistic about the brand building and productivity maximization initiatives during the same period.
Further, Colgate’s Global Growth and Efficiency Program or 2012 Restructuring Program, and Funding the Growth initiatives are encouraging. Acknowledging the success of the Global Growth and Efficiency Program, the company approved an expansion and extension of the program through Dec 31, 2019. This will enable Colgate to take advantage of the incremental opportunities while streamlining operations. Also, management expects to generate after-tax savings of $500-$575 million from the program. In fact, the projected savings target a three to four-year average cash payback, with an after-tax rate of return above 30%.
The Global Growth and Efficiency Program focuses on reducing structural costs to drive gross and operating profit, standardize processes to improve the decision-making procedure and enhance its market share position worldwide. By funding the growth initiative, the company aims at opening new environmentally sustainable distribution centers for offering better service to its customers, and reducing fuel and transportation costs.
Want Better-Ranked Consumer Staples Stocks? Check These
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Archer Daniels Midland Company (ADM - Free Report) delivered an average positive earnings surprise of 26.9% in the trailing four quarters. The company carries a Zacks Rank of 2.
Church & Dwight Co., Inc. (CHD - Free Report) is also a Zacks Ranked #2 stock, which has an expected long-term earnings growth rate of 10.1%.
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