Slowing Growth Bites Colgate’s Sales, but Profits Sparkle
The firm’s expansive global scale and brand intangible assets support a wide moat.
Unfavorable foreign exchange and slowing category growth took a toll on Colgate-Palmolive’s (CL) fourth-quarter sales, which were up just 1.5% on an organic basis. This overshadowed continued profit improvement, as adjusted gross margins soared 180 basis points to 60.8% and adjusted operating margins jumped 190 basis points to 27.9%. Despite the sequential step down in the top line from the 4.5% underlying gains chalked up in the third quarter, we believe Colgate’s leading brand mix, entrenched retail relationships, and cost advantages will enable the company to weather recent headwinds.
Our thinking regarding the sustainability of Colgate’s competitive edge is based on the firm’s strategic bent toward driving balanced and profitable top-line growth, combined with our expectation that the firm is reluctant to veer from this course. Between fiscal 2009 and fiscal 2016, Colgate drove a nearly 5% average top-line increase, with growth fairly balanced between prices (up more than 2%) and volume (up almost 3%). Management’s rhetoric continues to echo the importance of locally relevant product innovation, even at premium prices. Therefore, our forecast calls for Colgate to spend north $1.5 billion (9%-10% of sales) on advertising and promotions and around $300 million (more than 1.5% of sales) on research and development, on par with wide-moat-rated peers Procter & Gamble (PG) and Unilever (UL)/(UN). This should ensure Colgate maintains its competitive prowess.
Erin Lash does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.