Colgate (CL) Q3 Earnings Meet; Stock Down on Dismal Sales

Colgate-Palmolive Co. CL posted in-line earnings in third-quarter 2016, thus maintaining its trend of beating and meeting estimates in alternate quarters for the fifth straight time. However, the top line, which has declined for over a couple of years now, marked its second consecutive miss in the reported quarter. It seems that this caused shares of the company to slip 1.8% in the pre-market trading session.

During the third quarter, the company continued to battle macroeconomic headwinds and lingering currency woes. Nevertheless, this consumer goods behemoth witnessed solid gross margin expansion yet again and also reaffirmed its guidance for 2016.

Quarterly adjusted earnings of 73 cents a share came in line with the Zacks Consensus Estimate and improved about 1% year over year. On a currency-neutral basis, adjusted earnings rose by double digits. Including one-time items, the company posted earnings of 78 cents per share, down 2.5% from the year-ago quarter.
 

FindTheCompany | Graphiq

Deeper Insight

Total sales of $3,867 million declined 3.3% year over year and also missed the Zacks Consensus Estimate of $3,932 million.

The company stated that the benefits of a 3% rise in prices were more than offset by a negative impact of 2.5% from currency fluctuations and a 4% drop in global unit volumes. However, excluding divested business and the effects of the previously announced deconsolidation of its Venezuelan operations, unit volumes rose 1.5%.

On an organic basis (excluding foreign exchange, acquisitions, divestitures and the deconsolidated Venezuelan operations), the company recorded sales growth of 4.5%, mainly driven by an 8% sales improvement in emerging markets despite tough economic conditions. Notably, the company witnessed organic sales growth at nearly all its operating divisions.

Adjusted gross profit margin was 60.4%, up 160 basis points (bps), backed by benefits of cost-saving initiatives under the company’s funding-the-growth and 2012 Restructuring Program, along with better pricing. These were partly offset by increased packaging and material expenses stemming from higher currency translation costs and the effect of deconsolidation of the Venezuelan operations.

In the reported quarter, adjusted operating profit of $1,022 million inched up 1%, with the adjusted operating margin improving 110 bps to 26.4% on enhanced gross margin, partly offset by a 70 bps increase in adjusted selling, general & administrative expenses as a percentage of revenues.

On a year-to-date basis, Colgate’s market share of manual toothbrushes reached 33.2%. Further, the company’s share in the global toothpaste market continued to grow, reaching 44%.

Segment Discussion

North America sales (21% of total sales) rose 1% in the reported quarter, driven by a 1.5% improvement in unit volume, offset by a 0.5% fall in pricing. Foreign exchange remained flat year over year. On an organic basis, sales grew 1%.

Latin America sales (24% of total sales) slumped 13% year over year as the benefits of a 9% increase in pricing were more than offset by a 16% plunge in unit volumes and negative impact of 6% from foreign exchange. Excluding the deconsolidation of Venezuelan operations’ impact, unit volumes inched up 1.5%, thanks to gains from Mexico. On an organic basis, sales rose 10.5%.

Europe (16% of total sales) sales slipped 1.5% year over year, owing to negative impact of 2.5% from lower pricing and 3% from foreign currency translation, somewhat compensated by a 4% rise in unit volumes. Unit volumes were driven by the strength noted in the U.K. and Germany. Europe organic sales inched up 1.5%.

Asia Pacific sales (19% of total sales) dipped 1.5%, attributable to a 2% negative impact from foreign exchange, partly compensated by a 0.5% improvement in pricing. Unit volumes remained flat year over year, while rising 2.5%, excluding divested businesses. Volume growth was primarily attributed to gains in India and the Philippines. On an organic basis, sales rose 3%.

Africa/Eurasia sales (6% of total sales) advanced 1.5% year over year, fueled by a 10.5% jump in pricing, partly offset by a negative impact of 7% from foreign currency exchange and a 2% dip in unit volumes. Soft volumes at South Africa could not be compensated by gains in the North Africa/Middle East regions. Organic sales for Africa/Eurasia escalated 8.5%.

Hill’s Pet Nutrition sales (14% of total sales) increased 2.5% year over year. During the quarter, positive impact from a 3.5% increase in pricing and 1% gain from foreign exchange was somewhat offset by a 2% drop in  unit volume. Unit volume declines in the U.S., Western Europe and Japan could not be compensated by benefits realized in the rest of Asia, Russia and Latin America. On an organic basis, sales rose 1.5% year over year.

Other Financial Details

Colgate ended the quarter with cash and cash equivalents of $1,298 million, total debt of $6,523 million, and shareholders’ equity (excluding non controlling interests) of ($133) million.

Net cash provided by operating activities came in at $2,317 million for the first three quarters of 2016.

COLGATE PALMOLI Price, Consensus and EPS Surprise
 

COLGATE PALMOLI Price, Consensus and EPS Surprise | COLGATE PALMOLI Quote

Outlook

Colgate anticipates macroeconomic and currency headwinds to linger throughout 2016. Hence, it expects net sales for 2016 to decrease in low to mid-single-digits, mainly reflecting the impact of adverse currency movements and the Venezuelan business deconsolidation. Nonetheless, even in the face of these challenges, management expects another year of robust organic sales growth on the back of new products across categories and geographical regions.

Excluding the Venezuelan operations from its 2015 and 2016 results, Colgate still envisions 2016 earnings per share to witness double-digit growth (on a currency neutral basis). As of the existing spot rates, management continues to expect gross margin to expand in 2016 and adjusted earnings per share in dollar terms to remain flat with 2015. On a GAAP basis, Colgate anticipates the bottom line to grow in high double-digits in 2016, along with gross margin expansion.  

Zacks Rank

Colgate currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the consumer staples sector include Ollie's Bargain Outlet Holdings, Inc. OLLI, with a Zacks Rank #1 (Strong Buy), Blue Buffalo Pet Products, Inc. BUFF and Spectrum Brands Holdings, Inc. SPB, each with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ollie's Bargain has to its credit a spectacular earnings trend as the company delivered a positive earnings surprise over the past four quarters. Moreover, its long-term EPS growth rate of 20.2% and positive estimate revisions over the past 60 days help it stand strong against the industry.

Blue Buffalo, with a long-term EPS growth rate of 16%, has seen positive estimate revisions for 2016, over the past 90 days. The company also flaunts a solid earnings surprise history.

Spectrum Brands, with a long-term EPS growth rate of 13.3%, has delivered back-to-back positive earnings surprises in the last two quarters.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>  

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
SPECTRUM BRANDS (SPB): Free Stock Analysis Report
 
COLGATE PALMOLI (CL): Free Stock Analysis Report
 
OLLIES BGN OUTL (OLLI): Free Stock Analysis Report
 
BLUE BUFFALO (BUFF): Free Stock Analysis Report
 
To read this article on Zacks.com click here.