Recent quarters have seen U.S. household and personal care (HPC) companies', including Colgate-Palmolive (CL -0.65%), Kimberly Clark (KMB -0.04%) and Procter & Gamble (PG -0.42%), organic sales and earnings growth being slightly affected by an economic slowdown and foreign currency impacts. However, on a positive note, the companies are doing well to mitigate the impact of the challenges by opting for product innovation, cost cut programs and increasing advertising spending to support volume growth. Also, improving economic forecasts for developed markets in 2014 will help the companies offset the currency impact and strengthen their performances.
Forging ahead
Despite the macro challenges, Colgate has been doing well to address challenges and has been observing impressive growth rates. The company has been targeting developing markets, which contribute about 50% to total sales, to grow its top line numbers, as growing population holds attractive growth potential. Also, Colgate has a solid and cost effective distribution network in emerging markets, which allows it to strengthen its presence. In addition, as developed markets have matured, Colgate is relying on cost cuts and promotions to expand its margins for its developed markets operations.
Colgate's solid performance is evident from its first quarter of 2014 organic sales growth of 6.5% YoY and a robust 10% YoY organic sales growth in developing markets, higher than Procter & Gamble's emerging market organic sales growth of 5%. As Colgate has a large international market business, the strengthening of the dollar had an adverse impact of 6.5% on its top line numbers during the recent first quarter. However, the growth prospects for Colgate in developing markets remain bright because of growing population, relatively non-discretionary nature of its products and continuous efforts to expand its presence in the region.
Colgate's 'funding the growth' program and restructuring efforts remain an important tool with the company to address uncertain macro events and pump up reinvestment spending to strengthen its product portfolio in the competitive business environment. The company is working to make its cost structure leaner by increasing manufacturing efficiencies, improving its distribution centers and lowering its overhead costs. Colgate's cost control execution seems to be on track as the company observed a 30bps reduction in overhead spending in the first quarter of 2014, which helped the company pump up its advertisement spending and strengthen its product innovation.
The company has increased its advertisement spending-to-revenues to 11% in the first quarter of 2014, as compared to 10.2% in the fourth quarter of 2013, in a bid to support its sales volume in the competitive environment. Procter & Gamble has advertisement spending-to-revenues of about 11.5%, indicating that Colgate still has relative space to increase its advertisement spending to support sales growth and product innovation. Higher advertisement spending is bringing favorable returns for Colgate, as it experienced 5% YoY sales volume growth in the recent quarter, more than that of Procter & Gamble's sales volume growth of 3% YoY.
Restructuring and a cost cut program initiated by Colgate are anticipated to result in savings of about $400 million and the company has guided for gross margin expansion of 75-125bps for 2014. Other than cost control measures, pricing is another possible tool in the company's hand to counter macro headwinds and expand margins.
Slashing costs
Kimberly Clark is another company, just like Colgate, working on its cost structure to expand margins and grow earnings. Kimberly experienced $70 million of costs savings under its 'Focused On Reducing Costs Everywhere' program (FORCE) and additional costs savings of $10 million as a result of its restructuring efforts in the first quarter of 2014. The cost cut efforts by the company resulted in a 60bps QoQ drop in total selling, general and administrative expenses in the first quarter of 2014. Moreover, the cost savings helped Kimberly offset unfavorable currency movements, which had a negative impact of $30 million on operating profit for the quarter. Procter & Gamble is also aggressively targeting cost cuts through improving manufacturing productivity and supply chain efficiencies, and is expecting to enjoy savings of $1.6 billion for fiscal year 2014.
Final Take
Colgate is among the leading HPC companies of the U.S. with an impressive global foot print and healthy product innovation. Also, the company's cost saving program remains key to expanding margins and fuel earnings growth. The company's recent performance reflects its power and execution to effectively address the uncertain macro events. Colgate has a solid business model and remains a high quality defensive growth stock.
