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Can Colgate-Palmolive’s Investors Expect Margin Expansion in 3Q?

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Impressive rise in margins

Colgate-Palmolive (CL) reported a 170-basis-point rise in its gross margin and operating margin in 2Q16. The company’s gross profit margin expanded to 59.9% in 2Q16 from 58.2% in 2Q15. This significant improvement in the company’s 2Q16 gross margin was due to its funding-the-growth initiatives, higher pricing, and the 2012 restructuring program, which was extended until December 31, 2017. However, higher raw and packaging material costs partially offset the favorable factors.

The gross margins of peers Procter & Gamble (PG) and Clorox Company (CLX) were 47.9% and 45.4%, respectively, in fiscal 4Q16, which ended on June 30, 2016.

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What drove the operating margin growth?

In 2Q16, Colgate-Palmolive’s operating margin increased to 24.6% from 22.9% in 2Q15. This increase was driven by higher gross margin, partially offset by an increase in selling, general, and administrative (or SG&A) expenses as a percentage of sales. The increase in 2Q16 SG&A expenses as a percentage of sales was due to a rise in overhead expenses and higher advertising investments.

The operating margin of the Oral, Personal & Home Care segment increased to 28.6% in 2Q16 from 27.1% in 2Q15. The segment saw a higher operating margin in the North America, Latin America, Asia-Pacific, and Africa and Eurasia regions. However, the operating margin in the Europe region contracted by 160 basis points in 2Q16 due to higher raw and packaging material costs, lower pricing, and a rise in overhead expenses.

The operating margin of the company’s Pet Nutrition segment expanded by 190 basis points due to lower SG&A expenses and a decline in other expenses.

Analysts’ expectations

Analysts are expecting Colgate-Palmolive’s gross profit margin to expand by 170 basis points and its operating profit margin to contract by 190 bps in 3Q16. The expectation of the increase in gross profit margin takes into account the expected benefits from the 2012 restructuring program.

The company continues to implement several productivity initiatives under its 2012 restructuring program. As part of this program, the company is expanding commercial hubs by grouping single-country subsidiaries into more efficient regional hubs. Colgate-Palmolive is also extending its shared services model to additional functional areas. The company continues to enhance and optimize its global supply chain and facilities in order to bring down costs and increase efficiency.

We’ll discuss analysts’ earnings expectations in the next part of this series.

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