Higher costs to blame
Similar to its peers, Colgate-Palmolive (CL) disappointed investors with its profit margins in 4Q17. The company’s profit margins remained subdued as increased costs associated with packaging and raw materials and price investments to drive volumes dented its profitability. However, the company’s focus on cost savings and higher volumes positively impacted Colgate-Palmolive’s profit margins.
Margin performance in 4Q17
Colgate-Palmolive’s adjusted gross margin fell 40 basis points to 60.4% in 4Q17 as lower pricing and increased raw and packaging material costs more than offset the sales leverage stemming from higher volumes and cost savings from its funding-the-growth program.
In comparison, gross margins for Procter & Gamble (PG) and Kimberly-Clark (KMB) also fell YoY during their recently reported quarters. Higher commodity prices and investments in price amid increased competition pressured the gross profit margins of these companies. Besides, analysts expect Clorox’s (CLX) profit margins to take a hit from increased commodity prices and increased logistics costs driven by the recent hurricanes.
Colgate-Palmolive’s adjusted operating profit margin fell 190 basis points to 26.0%, reflecting lower gross margins, higher overhead expenses, and stepped up advertising investments.
Colgate-Palmolive’s management expects its adjusted gross profit margins to expand by 50 to 75 basis points in 2018. The company’s plans to generate higher cost savings should supplement its margins expansion. Besides, anticipated improvements in pricing and higher volumes are expected to offset the negative impact of inflation in input costs. However, the planned increase in advertising costs to support new products could continue to hurt the company’s operating margins in coming quarters.