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Colgate (CL) Gains From Growth Strategies, Cost Woes Persist

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Colgate-Palmolive Company CL is progressing well with product innovation and in-store implementation, which have been key aspects of its growth strategies. The company’s expansion in new markets and investments in brands also bode well. It is set to expand its already strong oral care portfolio with the planned buyout of Hello Products LLC. Meanwhile, the company’s better pricing, strategic marketing, investments in e-commerce capabilities and innovative product launches are aiding its performance.

In the past three months, shares of this Zacks Rank #3 (Hold) company have increased 13.2%, outperforming the industry’s growth of 4.5%.

Factors Narrating Colgate’s Growth Story

Colgate’s innovation strategy is focused on growing adjacent categories and product segments. Further, it is focused on the premiumization of its Oral Care portfolio through major innovations. The company is set to expand its oral care portfolio with the recent announcement of the agreement to buy Hello Products LLC, a leading oral care brand in the United States that produces eco-friendly and organic products. The brand’s products, which have a distinct position in the market, are extremely popular with young consumers and across the broader segment. Further, the brand fully complements the company’s Tom’s of Maine and Colgate brands.

Moreover, the company’s innovation efforts are highlighted by the re-launch of Colgate Total and Hill’s Science Diet as well as the continued expansion of the Naturals and Therapeutics divisions. This, along with accelerated investments in brands and higher pricing, is likely to aid the top line in 2020.  Presently, the Naturals range is a key area of focus for the company in personal and home care categories.

The company is also aggressively expanding into faster growth channels while extending the geographic footprint of its brands. In 2019, Colgate expanded its portfolio by introducing pharmacy brands like elmex and meridol to newer markets. Moreover, it remains impressed with the performance of professional skincare businesses — Elta MD and PCA Skin — in spas and dermatologists.

Further, the company expanded its premium skincare portfolio with the buyout of Filorga skincare business. It is also keen on expanding the availability of its products through the e-commerce channel. Moreover, the company is likely to launch the Hill’s to home, which will enable pet parents to purchase prescription diet products directly from their veterinarian, with home delivery option. All these actions are likely to drive top-line growth in 2020.

For 2020, management expects top-line gains, backed by accelerated investment in brands, higher pricing and strong innovation. The company expects top-line growth of 4-6% and organic sales growth of 3-5% for 2020, based on current spot rates. On a GAAP basis, earnings per share for 2020 are likely to increase in a mid to high-single digit. Meanwhile, the company expects adjusted earnings per share to rise in a low to mid-single digit.

Possible Deterrents

Colgate is grappling with higher SG&A expenses for a while now. In the fourth quarter of 2019, the company’s adjusted operating margin contracted mainly due to rise in SG&A expenses on higher advertising investment. Going forward, management anticipates higher advertising spending in 2020 (both on a GAAP and adjusted basis), which may continue hurting its operating income and profitability.

Also, the company is witnessing adverse currency fluctuations for a while now. Adverse currency rates had a 1.5% negative impact on net sales in fourth-quarter 2019. Unfavorable currency also impacted sales across all geographic regions except North America and Africa/Eurasia. Also, raw material costs, which included foreign exchange transaction costs, marred gross margin.

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