Can Colgate's (CL) Growth Strategies Help Regain Momentum?

Notably, first-quarter 2018 was the second straight quarter of recording a negative gross margin and the fourth consecutive quarter of witnessing a decline in the operating margin. Gross margin declined 40 basis points (bps) in both first-quarter 2018 and fourth-quarter 2017. Meanwhile, the company recorded operating margin decline of 20 bps in first-quarter 2018, preceded by contraction of 190 bps, 160 bps and 10 bps, respectively, in the fourth, third and second quarters of 2017. Increased raw material and packaging costs, as well as higher SG&A expenses impacted margins.

However, gains from cost-saving initiatives under the funding-the-growth and the 2012 Restructuring Program partly offset the decline. Let’s analyze the factors that can help turnaround this Zacks Rank #3 (Hold) stock’s performance.

Strategies Capable of Supporting Growth

Colgate is on track with its savings programs — the Global Growth and Efficiency Program or 2012 Restructuring Program, and the funding-the-growth initiative. Acknowledging the success of the Global Growth and Efficiency Program, on Oct 26, the company’s board 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 company expects after-tax savings of $500-$575 million from the program. The projected savings target a three to four year average cash payback, with an after-tax rate of return above 30%.

The four-year Global Growth and Efficiency Program focuses on reducing structural costs to improve gross and operating profits, standardizing processes to improve the decision-making procedure and enhance its market share worldwide.

On the other hand, by the funding-the-growth initiative, the company aims at opening environmentally sustainable distribution centers to offer better service to its customers while also reducing fuel and transportation costs. These programs are expected to contribute significantly toward the improvement of gross and operating margins over the long term.

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Additionally, innovation and in-store implementation have been the guiding principles for Colgate’s growth strategy over the years. This has enabled it to capture market share across all regions and categories. With regards to innovation, the company is rolling out the Naturals range in various markets. It has managed to tailor the Naturals’ offerings in each of its major markets. On a year-to-date basis, through Apr 27, the company’s global market share in the manual toothbrush and toothpaste businesses reached 32.5% and 42.4%, respectively.

Decent Earnings Trend & Bullish Outlook

Colgate, which is known for its meet or beat history, delivered an earnings beat in first-quarter 2018, after three consecutive quarters of in-line earnings. Results continue to be driven by solid sales and significant market share gains. The company remains on track with the brand building and productivity maximization initiatives in the future. Consequently, it expects net sales to increase in mid-single-digit in 2018 while organic sales are likely to grow in a low to mid-single digit. Further, the company anticipates witnessing sequential improvement in organic sales through the rest of the year.

Bottom Line

While the soft-margin trend remains a concern in the near term, we believe that Colgate is poised for growth in the long term, supported by its growth strategies. Further, its innovation strategy is likely to enhance market share across the globe.

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