Colgate-Palmolive Returned to Growth in the Fourth Quarter

Check out the latest Colgate-Palmolive earnings call transcript.

Investors were cautious about Colgate-Palmolive (CL 1.07%) ahead of its fourth-quarter report. Like many of its peers in the consumer products industry, the toothpaste titan has struggled with the twin challenges of weak demand growth and spiking commodity costs. Either problem on its own would be relatively straightforward to address, but the combination of the two makes it difficult to protect both market share and profitability.

The company's actual results did little to change that broader narrative, despite pockets of good news regarding both the top and bottom lines. Here's a look at how Colgate-Palmolive's results stacked up against those from the prior year:

Data source: Colgate's financial filings. 

What happened this quarter?

After accounting for currency-exchange swings and one-time tax charges, sales returned to modest growth in the period, but profitability and earnings both declined. The company maintained its dominant market share position, too, despite volume struggles tied to its latest round of price increases.

Image source: Getty Images.

Some highlights of the quarter:

• Organic sales rose 2% -- a nice rebound from the prior quarter's slight decline. That was supported by higher advertising and marketing expenses, and new product introductions.
• Sales gains came entirely from price increases, as global volumes were roughly flat.
• Gross profit margin declined as the company spent more on commodities, and only passed along part of those cost increases to customers in the form of higher prices. Operating profit margin fell, too, due to rising expenses.
• Overall, operating profit fell to $891 million, or 23% of sales, from $960 million, or 25% of sales, a year earlier.
• Colgate's global market share held steady at 42% for toothpaste, and 32% for manual toothbrushes.

What management had to say

CEO Ian Cook highlighted the company's return to growth in the period. "We are pleased with the improvement in organic sales growth this quarter," he said in a press release, "driven by 2.5% [higher] pricing."

Executives said they were happy that demand trends extended the company's "leadership of the global toothpaste [and toothbrush] markets" into 2019, especially given the higher average selling prices across the portfolio.

Looking forward

Cook and his team forecast that 2019 would look a lot like the sluggish year that just closed. Organic sales should rise by between 2% and 4%, they predicted, compared to 2% in 2018. Colgate intends to pass along most, but not all, of the expected increase in manufacturing costs. That fact, plus an expected rise in marketing spending, should ensure that profitability inches lower for a second straight year.

Given the challenges being faced by the industry broadly, management would gladly take that temporary profit drop -- assuming it supports faster sales growth and improved market share. That's essentially what they are predicting, but the modest scale of the sales rebound they expect highlights the fact that they foresee tough selling conditions extending into 2019, which will keep a lid on investor returns.