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Colgate Down 6% in 3 Months: Can Growth Efforts Revive Stock?

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Colgate-Palmolive Company CL is reeling under a weak margins trend and adverse impacts of foreign currency. Alongside this, a dismal bottom-line view for 2019 has hurt investors’ sentiments.

We note that shares of the company have dipped 6% in the past three months compared with the industry’s decline of 0.3%.

Let’s delve deeper to look at the factors causing a rift.



Factors Hurting the Stock

Colgate has been witnessing strained margins for a while. In third-quarter 2019, adjusted gross margin declined 20 basis points (bps), driven by escalated raw and packaging-material expenses, including foreign-currency transaction costs. This coupled with higher SG&A expenses, as a percentage of sales, hurt adjusted operating margin, which contracted 50 bps. Higher advertising investment resulted in rise in SG&A expenses, which was partly negated by lower overhead costs. Notably, the company delivered negative gross margin in five of the trailing six quarters. It also posted the tenth consecutive quarter of operating margin decline in third-quarter 2019. 

Management anticipates a slight gross margin decline for 2019, both on a GAAP and adjusted basis. Further, it continues to expect higher advertising spending throughout 2019.

Moreover, unfavorable movements in foreign currency have been taking a toll on the company’s top line to some extent. In third-quarter 2019, currency headwinds adversely impacted net sales to the tune of 2.5%. Moreover, unfavorable currency impacted sales across all geographic regions, except for North America, where currency rates were flat in the quarter. Moreover, raw material costs, which included foreign exchange transaction costs, marred gross margin by 310 bps.

Management expects higher raw material costs, uncertainties in the global economy and currency rates to hurt the bottom line in 2019. The company expects a mid-single-digit decline in adjusted earnings per share for 2019.

Efforts to Counter Woes

Colgate is on track with product innovation and in-store implementation, which have been key aspects of its growth strategies for years. The company’s innovation strategy is focused on growing adjacent categories and product segments. Further, it remains focused on the premiumization of its Oral Care portfolio through major innovations. The company has a solid innovation pipeline in the next few quarters, which includes the launch of Optic White. Additionally, it continues to expand Naturals toothpaste and prescription diet. In fact, the Naturals range is a key area of focus for the company in personal and home care categories. 

Further, Colgate continues to expand portfolio by introducing pharmacy brands like elmex and meridol to newer markets. Moreover, it remains impressed with the performance of its professional skincare businesses — Elta MD and PCA Skin — in spas and dermatologists. Also, the company is on track to expand the premium skincare portfolio with the buyout of the Filorga skincare business. It is also expanding product availability through the e-commerce channel. All these actions are likely to drive top-line growth in 2019.

Furthermore, Colgate is progressing well with its savings programs, namely Global Growth and Efficiency Program (or 2012 Restructuring Program), and Funding the Growth. The company expects after-tax savings of $500-$575 million from these programs. These programs are expected to contribute significantly toward the improvement of gross and operating margins over the long term.

Bottom Line

We expect the aforementioned growth drivers to help offset the hurdles and help the Zacks Rank #3 (Hold) stock gain momentum.

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