Colgate (CL) Dips On Hiked Charges View, Q3 Earnings In Line

Colgate-Palmolive Co. (NYSE:CL) posted adjusted earnings of 73 cents a share in third-quarter 2017, in line with the Zacks Consensus Estimate and flat with the prior-year quarter.

Including one-time items, earnings came in at 68 cents a share compared with 78 cents reported in the year-ago period.

Despite earnings beat, Colgate’s shares are down 1.4% during pre-market trading hours, as it raised guidance for charges. In fact, the stock has increased 8.8% year to date, underperforming the broader industry’s growth of 13.8%.

Deeper Insight

Total sales of $3,974 million improved 3% from the year-ago period and topped the Zacks Consensus Estimate of $3,930 million. The top line gained from 1.5% increase in unit volumes and favorable currency impact of 1.5%, alongside flat pricing from last year.

On an organic basis (excluding foreign exchange, acquisitions and divestitures), the company’s sales increased 1.5% from last year.

Adjusted gross profit margin was 60.4%, flat with the prior-year quarter. During the quarter gains from the cost-saving initiatives under the company’s funding-the-growth and 2012 Restructuring Program, were neutralized by increased raw and packaging material expenses.

In the reported quarter, adjusted operating profit of $985 million dipped 4%, with the adjusted operating margin contracting 160 basis points (bps) to 24.8%. Operating margin decline can be attributed to 140 bps rise in adjusted selling, general & administrative expenses as a percentage of sales, which included higher investments in advertising.

Year to date, Colgate’s market share of manual toothbrushes has reached 32.6%. Further, the company continued to lead with market share in the global toothpaste with a gain of 43.5% year to date.

Segment Discussion

North America net sales (20% of total sales) fell 0.5%, reflecting a 4% decline in pricing offset by 3% rise in unit volume and favorable currency impacts of 0.5%. On an organic basis, sales declined 1%.

Latin America net sales (25% of total sales) jumped 6.5% year over year gaining from 2.5% increase in pricing and 3% volume gains, as well as positive currency impact of 1%. Volume growth can mainly be attributed to increase in Brazil and the Southern Cone region. On an organic basis, sales increased 5.5%.

Europe net sales (16% of total sales) rose 5.5% year over year, due to 3% increase in unit volumes and a favorable currency impact of 4.5%, offset by 2% decline in pricing. Unit volumes gained from strength in France, Italy, Netherlands and Poland. Europe organic sales were up 1%.

Asia Pacific net sales (18% of total sales) inched up 0.5%, attributable to 0.5% positive currency impacts, while unit volume and pricing remained flat. Volumes in the quarter benefited from strength in the Greater China region and the Philippines, fully neutralized by declines in Australia and India. On an organic basis, sales for Asia Pacific were flat with last year.

Africa/Eurasia net sales (6% of total sales) inched up 0.5% year over year, fueled by 2.5% gains from both pricing and positive currency effects, partly offset by 4.5% drop in unit volumes. Volume declines in the Sub-Saharan Africa and Middle East regions, were partly offset by gains in Russia. Organic sales for Africa/Eurasia dropped 2%.

Hill’s Pet Nutrition net sales (15% of total sales) were up 2% from the year-ago quarter. During the quarter, positive impact of 1% from increase in unit volume and currency were somewhat neutralized by flat pricing. Volume gains in the United States and Western Europe were offset by fall in Japan. On an organic basis, sales rose 1%.

Other Financial Details

Colgate ended the quarter with cash and cash equivalents of $1,380 million and total debt of $6,527 million. Net cash provided by operating activities came in at $2,295 million for the nine months ended Sep 30, 2017.

Other Developments

Acknowledging the success of the Global Growth and Efficiency Program to date, the company’s board on Oct 26 approved an expansion and extension of the program through Dec 31, 2019. This will enable the company to take advantage of the incremental opportunities in the process of streamlining operations. The expansion is expected to attract cumulative after-tax charges of $1,280-$1,380 million from the program, marking an increase from the previously estimated charges of $1,120-$1,170 million. After-tax charges for 2017 are now likely to be in the range of $250-$280 million.

Additionally, the company expects after-tax savings from the program to increase to $500-$575 million, compared with $425-$475 million estimated earlier. The projected savings target a three to four year average cash payback, with an after-tax rate of return above 30%.

Outlook

Looking forward, Colgate anticipates the backdrop to remain challenging due to uncertain global markets and slowing category growth worldwide. However, the company remains on track with its brand building and productivity maximization initiatives. Consequently, the company reiterated low-single digits growth projection for both net sales and organic sales for 2017.

Including the impact of the expanded Global Growth and Efficiency Program, the company continues to expect gross margin expansion for 2017, along with mid-single digits percentage decline in GAAP earnings per share.

Excluding the restructuring charges resulting from the program and other one-time items, the company projects strong cash flow generation, gross margin expansion and higher advertising investments for 2017. Further, the company anticipates low-single digit earnings per share growth for the year, on an adjusted basis.

Zacks Rank & Key Picks

Colgate currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the consumer staples sector include Unilever Plc (NYSE:UL) , Snyder's-Lance, Inc. (NASDAQ:LNCE) and McCormick & Company, Incorporated (NYSE:MKC) , 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 9.3%, has increased 36.3% year to date.

Snyder's-Lance has increased 6.7% 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 2.1% in the past four quarters.

McCormick & Company, with long-term EPS growth rate of 9.4%, has grown 3.7% in last three months.

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