)posted promising results in Q3 2013, despite facing emerging
market headwinds. Organic sales (net sales excluding foreign
exchange, acquisitions and divestments) grew 6.0% y-o-y as volumes
and prices increased by 5% and 1%, respectively. The oral care
giant managed to grow net sales to $4.4 billion, up by 1.5% y-o-y,
as foreign exchange losses offset the impact of organic sales
growth by 4.5%.
Colgate's key emerging markets including India, Brazil and South
Africa have been suffering from currency weaknesses. Rapid currency
depreciation in these markets has created inflationary pressures on
buyers, thereby reducing demand. In addition, the unfavorable
exchange rates have adversely impacted revenues of companies that
have high exposure to emerging markets.
Last week, Colgate's close rival
) also released its third quarter results. The company saw
underlying sales (sales from continuing operations excluding
acquisitions, disposals and currency movements) growth fall to 3.2%
y-o-y from 5% in the first half of the year, mainly due to sluggish
growth in the emerging markets. Currency headwinds in these markets
also took a toll on revenue. Unilever's Q3 2013 revenue declined
6.5% y-o-y due to unfavorable exchange rates. Although its
performance in the developed markets improved, underlying sales
growth in these markets was still negative.
In the past several quarters, balancing the business mix between
developed and emerging markets has helped Colgate achieve above
market growth and experience only a moderate impact on net sales
from currency devaluations. Moreover, gross margin improvement has
allowed it to increase advertising support behind its products
while also increasing the operating profit. With innovations, new
product launches, savings and heavy marketing activity expected to
continue in Q4 2013 and beyond, we believe that Colgate-Palmolive
will continue to outperform its peers.
price estimate of $56 for Colgate-Palmolive
stands at a discount of about 10% to the market price.
See our full analysis for Colgate-Palmolive
New Product Activity And Cost Savings Will Continue To
Emerging markets contribute about 53% to Colgate's total
revenues, the remainder coming from developed economies. Increasing
penetration of its products through continuous innovation, new
product launches and a robust distribution channel, has allowed
Colgate to build a strong foothold in its markets. Despite slower
growth in the global economy, the company delivered well in both
the emerging, as well as the developed economies.
Colgate's gross margin stood near 60% in Q3 2013. The company
has seen expansion in its gross margin through the year owing to
its funding-the-growth program. Gross margin improvement, via
company-wide initiatives to lower input costs and increase asset
utilization, has allowed the company to increase the advertising
spend for its products.. This in turn has helped it to protect
its market share amid rising competition in some of its important
markets including the U.S., India and Mexico.
Colgate launched several new products, backed by innovations and
marketing campaigns, across its markets in Q3 2013. It also
increased its advertising spend by 6% y-o-y to ~$480 million. The
company intends to continue launching new products in Q4 2013 and
beyond. Additionally, its savings program is on track, which should
allow it to further increase advertising support. We believe that
these factors position the company well for above market growth in
Hill's Pet Nutrition Recovery Speeds Up
Net sales at Colgate's pet nutrition division declined 0.5% in
2012 and 1.5% in Q1 2013, mainly due to lower volume sales. The
company managed to turnaround the business in Q2 2013 on the back
of strong innovation, and effective communication with customers
through a widespread marketing campaign. The turnaround occurred a
quarter ahead of schedule due to faster execution from the
company's retail partners, PETCO and PetSmart.
Colgate continued to focus on Hill's and also reap the benefits
of the same in Q3 2013. Its integrated marketing campaign for
Science Diet line of products is successfully communicating the
benefits of natural ingredients to pet owners. Its distribution
strength in Ideal Balance is also building on the back of strong
support from the largest pet retailers. Consequently, the
management expects mid single-digit organic sales growth in 2013,
compared to 1.5% growth in 2012.
With rising awareness about pets' problems, new additions to the
Science Diet and the Ideal Balance range of products, and effective
communication between Colgate and pet owners, we believe that
Hill's will be able to sustain its growth that it picked in Q2
We are in the process of updating our $56 price estimate for
Colgate-Palmolive based on the Q3 2013 earnings results.
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