Colgate-Palmolive Company (NYSE:CL) CL, which is a leading consumer goods company, is one of the prime beneficiaries of the coronavirus pandemic-induced demand escalation for personal and home care products. This trend has proved to be a blessing for the soaps and cleaning materials industry. Notably, there has been a marked increase in products for maintaining personal and home hygiene to prevent the spread of the virus.
The company noted that accelerated growth in both top and bottom lines in third-quarter 2020, driven by the continued demand for personal and home care products as well as the finest innovation across product categories. In North America, the company’s focus on premium innovation like hum by Colgate, Colgate Optic White Renewal toothpaste, and the Colgate Optic White Overnight Teeth Whitening Pen helped to drive strong pricing growth in the oral care category in the third quarter. Further, innovation in naturals and whitening products is driving growth in the Latin America division, while premium innovation is aiding the Colgate China business.
Backed by favorable third-quarter results and improved visibility through the rest of 2020, Colgate outlined its guidance for 2020. It predicts both net sales and organic sales growth in mid-single digits, with organic sales expected to increase at the high-end of the mentioned range. It expects gross margin expansion on both GAAP and adjusted basis, with an increase in advertising investments. Additionally, the company anticipates a double-digit increase in GAAP earnings per share. Meanwhile, adjusted earnings per share are expected to grow 6-7%.
Notably, the shares of this Zacks Rank #3 (Hold) company has rallied 7.6% in the past three months, compared with the industry’s 0.2% growth.
Other Growth Drivers
Colgate has been witnessing gross margin expansion for the past four quarters, driven by robust pricing and productivity gains. Notably, the company’s commitment toward pricing efforts through premiumization and revenue growth management has been paying off. This has resulted in organic sales growth and gross margin expansion. Moreover, its funding-the-growth endeavors are contributing to productivity growth.
In third-quarter 2020, adjusted gross profit margin of 61.2% increased 220 basis points (bps) from the prior-year quarter. Gross margin growth mainly reflected 170 bps of gains from pricing, a 250-bps benefit from productivity and 30 bps other benefits, partly offset by raw material cost headwind. Driven by the strong gross margin and sales, the company’s adjusted operating income improved 11%, with a 120-bps expansion in the adjusted operating margin rate to 24.1%.
Moreover, the company has increased its focus on this platform as more consumers are using online services for their essential needs, given the COVID-19 outbreak. This led the e-commerce business to grow nearly 50% in the first and second quarters of 2020 and continued strong growth in the third quarter, backed by the solid online show in Hill’s and U.S. businesses. Further, it has been witnessing strong market share gains in North America and China, its two largest markets, with increased share gains across all other regions.
We note that the company has expanded the availability of its products through e-commerce offerings with the launch of Hill’s to home, which enables pet parents to purchase prescription diet products directly from their veterinarian with a home delivery option. All these actions are likely to fuel sales.
Pandemic-Related Cost Headwinds
Meanwhile, Colgate has been grappling with higher selling, general & administrative (SG&A) expenses for a while now. During the third quarter, adjusted SG&A expenses increased 8.1%, whereas as a percentage of sales it deleveraged 90 basis points to 36.6%. The increase in SG&A expenses may be attributed to increased advertising investment and higher logistics costs. Advertising expenses rose 70 bps, as a percentage of sales, whereas it increased 13% year over year on an absolute basis. Moreover, the company witnessed moderately higher logistics expenses due to increased demand amid the pandemic.
Despite pricing gains, the company’s sales for the third quarter continued to be hurt by adverse currency rates. Currency translations had a 4% negative impact on net sales. Looking ahead, management expects negative currency impact at the lower of its previously predicted range of mid-single-digit on net sales for 2020, based on current spot rates.
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