Colgate (CL) Dips Despite In-Line Q2 Earnings, Sales Lag

Colgate-Palmolive Co. (NYSE:CL) posted adjusted earnings of 72 cents a share, in line with the Zacks Consensus Estimate and up 3% from 70 cents earned in the prior-year quarter.

Including one-time items, earnings came in at 59 cents a share compared with 67 cents reported in the year-ago period.

Despite earnings beat, Colgate’s shares are down 2.3% during pre-market trading hours, as investors remained skeptical about the company’s top-line performance that fell short of expectations for the fifth straight quarter. In fact in the last three months, the stock has declined 2.1% compared with the broader industry’s growth of 2.9%.

Deeper Insight

Total sales of $3,826 million dipped 0.5% from the year-ago period and came below the Zacks Consensus Estimate of $3,885 million. The benefits of 1% increase in prices were offset by a 1% drop in global unit volumes and a negative impact of 0.5% from currency fluctuations.

On an organic basis (excluding foreign exchange, acquisitions and divestitures), the company’s sales were flat with last year. The flat results were due to the persistence of softness in North America and challenges in Asia-Pacific. This was considerably mitigated by strong organic sales growth in Latin America and the return to positive organic sales growth in Hill’s Pet Nutrition.

Adjusted gross profit margin was 60.7%, up 50 basis points (bps), driven by benefits of cost-saving initiatives under the company’s funding-the-growth and 2012 Restructuring Program, along with better pricing. These were partly neutralized by increased raw and packaging material expenses, including currency exchange transactions costs.

In the reported quarter, adjusted operating profit of $995 million dipped 1%, with the adjusted operating margin contracting 10 bps to 26% on 40 bps increase in adjusted selling, general & administrative expenses as a percentage of sales, offset by improved gross margin.

Year to date, Colgate’s market share of manual toothbrushes has reached 32.8%. Further, the company continued to lead with market share in the global toothpaste with a gain of 43.6% year to date.

Segment Discussion

North America net sales (20% of total sales) fell 3.5%, reflecting a 2% drop in unit volume and 1.5% decline in pricing. However, currency fluctuations were flat with the prior-year quarter. On an organic basis, sales declined 3.5% on account of market share losses in the dish liquid business and increased slowdown in category growth, both in the U.S.

Latin America net sales (26% of total sales) jumped 7% year over year gaining from 4.5% increase in pricing and 2.5% volume gains, while currency fluctuations were flat with the prior-year quarter. Volume growth can mainly be attributed to increase in Brazil, the Andean region and Argentina. On an organic basis, sales increased 7%.

Europe net sales (15% of total sales) slipped 3.5% year over year, due to 1% decline in unit volumes and negative impact of 3% from currency fluctuations, partially offset by 0.5% increase in pricing. Unit volumes were hurt by declines in Germany and Norway, offsetting gains in the Netherlands, U.K. and Poland. Europe organic sales dipped 0.5%.

Asia Pacific net sales (18% of total sales) declined 5%, attributable to 2% decline in unit volume and 1.5% fall in pricing and 1.5% negative impact from currency fluctuations. Unit volumes declines in India, Thailand and Australia were partly offset by gains in the Philippines, Vietnam and New Zealand. On an organic basis, sales for Asia Pacific decreased 3.5% due to the inventory reductions by wholesalers in India in anticipation of the new Goods and Services Tax that went into effect on Jul 1, 2017. Additionally, increased competition related activities in Australia and lower consumptions in Thailand acted as headwinds.

Africa/Eurasia net sales (6% of total sales) inched up 1% year over year, fueled by 4.5% jump in pricing and positive currency effects of 4%, partly offset by 7.5% drop in unit volumes. Volume declines in the Sub Saharan Africa region, Turkey and South Africa were partly offset by gains in Russia. Organic sales for Africa/Eurasia dropped 3%.

Hill’s Pet Nutrition net sales (15% of total sales) were flat with the year-ago quarter. During the quarter, positive impact from 2% increase in pricing was neutralized by 1.5% decline in volumes and 0.5% negative impact from foreign exchange. Unit volume declines in the U.S., Japan and Canada were slightly countered by gains in Russia, Latin America and South Africa. On an organic basis, sales rose 0.5%.

Other Financial Details

Colgate ended the quarter with cash and cash equivalents of $1,241 million and total debt of $6,519 million. Net cash provided by operating activities came in at $1,305 million for the six months ended Jun 30, 2017.

Outlook

Looking forward, Colgate anticipates the backdrop to remain challenging due to uncertain global markets and slowing category growth worldwide. Consequently, the company reiterated net sales projection for 2017 anticipating low-single digits growth. However, on account of the soft first half 2017, management now envisions organic sales growth for 2017 to be in the low-single digit range, compared with the previous forecast of moderately below 4–7% range.

Nevertheless, the company remains encouraged by the progress on its 2012 Restructuring Program and continues to pursue additional savings opportunities under the program. In this regard, the company stated that the additional opportunities identified in the second-quarter provide visibility for reaching the upper end of its previously announced cost and savings guidance range.

Consequently, on a GAAP basis, management forecasts gross margin expansion for the year. Further, it expects GAAP earnings per share, on a dollar basis, to decline in the mid-single-digit percentage range, compared with the previously stated flat guidance.

Excluding charges related to the 2012 Restructuring Program and the other 2016 one-time items, Colgate continues to project low-single-digit earnings per share growth on a dollar basis for 2017. Further, the company anticipates robust operating cash flows, gross margin expansion and rise in advertising investment for the year.

Zacks Rank & Key Picks

Colgate currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Unilever Plc (NYSE:UL) , Church & Dwight Company Inc. (NYSE:CHD) and The Clorox Co. (NYSE:CL) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Unilever, with long-term EPS growth rate of 11.7%, has increased nearly 13.5% in the last three months.

Church & Dwight has a long-term EPS growth rate of 9.3% and has increased 5.5% in the last three months. Moreover, the company has to its credit a spectacular earnings history as it delivered an average positive earnings surprise of 6.3% in the past four quarters.

Clorox, with long-term EPS growth rate of 6.8%, has grown 9.1% year to date.

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