Colgate to keep raising prices as inflation slows to boost margins and profit

By Tomi Kilgore

Profit and sales beat forecasts but volume falls again, and stock drops

Colgate-Palmolive Co.'s laser focus on improving margins and strengthening profit appeared to pay off, as continued price increases helped the consumer-products company beat earnings expectations and raise its full-year outlook.

But the stock (CL) fell 3% in midday trading, enough to lead its peer group (XLP) in losses and to buck the rally in the broader stock market, as volume declined and market share in some products took a hit from reduced promotions.

On the post-earnings conference call with analysts, Chief Executive Noel Wallace said that coming out of the "worst raw-material environment in decades," the "key focus" was to restore gross margins through pricing and productivity.

"The key to do this is getting pricing in the P&L," Wallace said, with P&L referring to profit and loss, or the company's bottom line.

He said that can't be done with just one round of pricing: "It needs to be consistent and deliberate and purposeful."

The company reported earlier Friday adjusted second-quarter profit that beat expectations and sales that rose 7.5% to top Wall Street forecasts.

Sales rose even as volume fell 1.5% from a year ago, because overall, prices rose 11% -- which comes on top of an 8.5% increase in prices last year. That compares with the latest government data showing that price increases have slowed to 3%, the lowest increase in nearly two years.

Higher pricing, some lower promotions and cost-cutting helped gross profit margins improve to 57.8% from 57%, but that was still down from 60% in the same period in 2021.

So to keep the focus on improving gross margins, even as the pace of input costs slow, prices will continue to increase.

"[N]ow as we look at cost inflation slowing overall, there are still places where we see margin pressure, so of course we need to take additional pricing, and this has had an impact on the volume," Wallace said on the call, according to a FactSet transcript.

Also read: U.S. wholesale inflation slows to a crawl, PPI shows.

He did acknowledge that the company may have pulled bank "a little too much" on some promotions to save money, as that did hurt market share.

For example, in North America, Colgate's share of the toothpaste market was 33.9% year to date and its share of the manual toothbrush market was 41%, compared with market shares of 34.3% for toothpaste and 42% for toothbrush after the first quarter.

When asked by an analyst whether the lost market share went to other companies or just to less spending by consumers, Wallace said it went to a "multitude" of competitors that didn't cut promotions.

He said he's not too worried about those "promotional" share losses, however, because those lost customers aren't loyal customers, but are those who are only focused on price.

"[C]learly that consumer typically responds to promotions, whether it's couponing or otherwise, and they're not that difficult to get back," Wallace said. "But we want to get -- we want to get those consumers back in a much healthier way moving forward so the overall structure of the U.S. P&L improves."

Basically, while margins and profit remain the key focus, price increases and spending cuts could continue, even if they lead to some volume and share losses.

Colgate's stock has dropped 6.3% over the past three months, while the Consumer Staples Select Sector SPDR ETF (XLP) has eased 1.8% and the S&P 500 has gained 10%.

-Tomi Kilgore

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

07-28-23 1315ET

Copyright (c) 2023 Dow Jones & Company, Inc.