Analyst Note| Erin Lash, CFA |
There was a lot to like in wide-moat Colgate’s third-quarter results. Organic sales popped 7.5% (reflecting a balanced contribution from increased volumes--3% benefit--and higher prices--up 4.5%), gross margins swelled 220 basis points to 61.2% (the highest quarterly point in more than a decade), and adjusted operating margins rose 120 basis points to 24.1%. Although a portion of these gains likely manifested from consumers’ heightened penchant for personal and home cleaning fare, we don’t think oral care has necessarily been a beneficiary of these trends. Rather, we surmise that the firm’s renewed focus on consumer-valued innovation (even that which comes with a higher price) is also playing a hand. Encouragingly, management isn’t letting these products foster on their own but is cultivating its fare with elevated brand spend (which was up 12.5% over the year-ago period to 11.5% of sales in the quarter). And we don’t expect Colgate to pullback on these efforts, as we forecast it will expend around 12% of sales (or more than $2 billion) annually on research, development, and marketing over the course of our explicit forecast, which we view as a prudent means to support is competitive prowess.