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Key Drivers behind Colgate-Palmolive’s 4Q16 Margin Expansion

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Feb. 1 2017, Updated 9:07 a.m. ET

Impressive rise in margins

Colgate-Palmolive (CL) reported a rise of 160 basis points in its gross margins for 4Q16. In 2016, its gross margins rose 140 basis points. The improvement was driven by the company’s funding-the-growth initiatives, higher pricing, and its 2012 Restructuring Program.

However, higher raw and packaging material costs, including the negative impact of currency headwinds, and the deconsolidation of its Venezuela business negatively impacted its gross margins.

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Operating margin growth drivers

In 4Q16, Colgate-Palmolive’s reported operating profit margin was 25.7% compared to -3.6% in 4Q15. Excluding one-time items, the company’s adjusted operating margin expanded 190 basis points to 27.9% in 4Q16. The expansion was driven by a higher gross margin, partially offset by a rise in SG&A (selling, general, and administrative) expenses as a percentage of sales. The rise in 4Q16 SG&A expenses as a percentage of sales was primarily due to higher overhead expenses.

The operating margin of the Oral, Personal, and Home Care segment rose to 31.2% in 4Q16, from 29.1% in 4Q15. The segment experienced a higher operating margin in the Latin America, Europe, and Asia-Pacific regions. However, the operating margins for the North America and Africa and Eurasia regions fell 100 basis points and 50 basis points, respectively, in 4Q16 due to a rise in SG&A expenses, partially offset by a rise in gross margins.

In Latin America, the operating margin rose 550 basis points due to a rise in pricing and savings from the funding-the-growth initiatives. The rise was offset by currency headwinds, the deconsolidation of the Venezuela business, and a rise in advertising investment.

The operating margin of the company’s Pet Nutrition segment expanded 200 basis points due to a rise in gross margin and a fall in other expenses. However, the rise was offset by higher SG&A expenses as a percentage of sales.

Colgate-Palmolive and Kimberly-Clark (KMB) make up 3.0% and 2.4%, respectively, of the Fidelity MSCI Consumer Staples ETF (FSTA).

We’ll look at analyst recommendations for Colgate-Palmolive stock in the next part of this series.

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