The consumer staples industry has been hampered by slow growth and rising costs that companies are struggling to pass along to consumers. Colgate Palmolive (NYSE:CL) hasn't proven itself to be immune from these challenges. In fact, the market share leader in toothpaste and toothbrushes lowered its sales outlook last quarter, which helped the stock underperform the broader market through the first half of 2018.
Colgate has a chance to shift that dynamic when it posts second-quarter results on Friday, July 27. However, investors aren't expecting dramatic improvements in its operating trends.
Market share checkup
Colgate managed to accelerate sales growth up to 2% at the end of fiscal year 2017. Yet that success didn't carry over into the current year. Instead, sales inched higher by just 1.5% in the first quarter to trail management's expectations.
CEO Ian Cook said the period was "a challenging one as category growth remained soft in many markets around the world." Executives highlighted healthy volume gains in developed markets like the United States and Europe, but said emerging markets were much weaker.
The good news is, despite tough sales conditions in the industry, executives expect sales gains to speed up over the next few quarters. Thus, investors will be looking for Colgate to announce better organic growth results than its most recent 1.5% uptick.
The company will also update investors on its market share position, which should stay strong. At its last check-in Colgate revealed that it controlled 43.3% of the global toothpaste market and 32.6% of worldwide sales of manual toothbrushes.
Costs and prices
Faster growth might come at a price, though. For Colgate, this trade-off would show up in two key places. First, keep an eye on gross profit margin, which ticked down to 60.2% of sales from 60.3% last quarter. That figure isn't likely to rebound without stronger pricing trends than the flat result investors saw in the first quarter. If Colgate can't pass along rising raw material prices to its customers, then management's cost cutting efforts won't do much more than limit profitability declines.
Second, investors should watch for changes in operating profit margin, which will reflect the company's stepped-up advertising and marketing commitments. That metric dipped to 25.2% last quarter from 25.4% as the company boosted ad spending by 4% to $416 million. Cook said management plans to continue that marketing effort so that, with help from innovative product launches, sales growth trends will improve over the next few quarters.
Finally, watch for an updated 2018 outlook that reflects the latest sales and profit trends. That forecast received a minor downgrade on both the top and bottom lines in late April. Regarding sales growth, management said they see organic revenue rising in the low single-digits whereas the prior forecast left open the possibility for mid-single-digit gains.
On profits, executives predicted low double-digit growth in per-share earnings for a slight decrease from their late January prediction. While it's possible that the 2018 forecast will rise due to a rebound in demand, the more likely scenario involves a steady, or even slightly deteriorating, outlook that follows the weak trends in the broader industry. As usual, investors can expect the earnings pinch to be muted this year, thanks to Colgate's dominant market position and its rock-solid finances.